Social Systems Research Institute
The University of Wisconsin - Madison
Room 6470 Social Science Building - 1180 Observatory Drive
Madison, Wisconsin 53706 U.S.A.
Phone: (608)262-0446
Fax: (608)263-3876
Electronic Mail: ssri@facstaff.wisc.edu
9801R AUCTIONS WITH PRIVATE UNCERTAINTY AN RESALE OPPORTUNITIES Haile, Philip A. (revised March 15, 1999)This paper studies auctions held before bidders are sure of the values they place on the object for sale, resulting in potential gains to subsequent resale trade. The existence of a resale market improves the expected payoff to an auction winner, since it gives him an option to sell if his value turns out to be relatively low. It also raises the expected payoff to a loser, since he may buy in the secondary market. Bidders' valuations are determined endogenously by these competing effects, can differ across auction types, and can be lower or higher than if there were no resale opportunity. Equilibrium bidding is based on these endogenous valuations but may also reflect incentives to signal to future opponents in the secondary market. Although resale creates common components in bidders' valuations, revenue equivalence holds in some cases while Milgrom and Weber's (1982) revenue ranking of auctions can be reversed in others. Depending on the expected distribution of rents in the secondary market, the initial seller may wish to ban resale or to induce uncertainty in order to create an active secondary market.
9813R ENDOGENOUS INEQUALITY IN INTEGRATED LABOR MARKETS WITH TWO-SIDED SEARCH Mailath, George J., Larry Samuelson and Avner Shaked (revised Feb. 2, 1999)We consider a market in which there are two types of workers, "red" and "green," where these labels have no direct payoff implications. Workers can choose to acquire costly skills. Skilled workers must search for firms with a job vacancy, while firms with vacancies also search for unemployed workers. A unique symmetric equilibrium exists in which firms ignore workers' colors. There may also exist an asymmetric equilibrium in which firms only search for green workers, more green than red workers acquire skills, skilled green workers receive higher wages than skilled red workers, and the unemployment rate is higher among skilled red than green workers, though there are more unemployed skilled green than red workers. Discrimination between ex ante identical individuals thus arises as an equilibrium phenomenon. Our analysis differs from previous models of discrimination in assuming that firms have perfect information about workers with whom they are matched, and strictly prefer to hire minority workers (contingent on meeting a worker), and in generating predictions concerning unemployment as well as wages.
9901 FEASIBLE OPTIMAL INSTRUMENTAL VARIABLES ESTIMATION OF LINEAR MODELS WITH MOVING AVERAGE DISTURBANCES West, Kenneth D., Ka-fu Wong and Stanislav Anatolyev* (December 1998)We propose and evaluate a feasible technique for optimal instrumental variables estimation of linear models with disturbances that follow a moving average process of known finite order and that may be conditionally heteroskedastic. The estimator is efficient in a class of ones that are linear in a possibly infinite set of instruments. Analytical calculations and simulations indicate that there sometimes are large asymptotic and finite sample efficiency gains relative to conventional estimators that use an instrument vector of small dimension (Hansen (1982)). These efficiency gains are robust to minor misspecification of a parametric model that is required to implement the estimator.
9902 GIVING ACCORDING TO GARP: AN EXPERIMENTAL TEST OF THE RATIONALITY OF ALTRUISM Andreoni, James and John H. Miller (January 25, 1999)Experiments reveal that behavior of subjects is often not consistent with money-maximization, especially when "fair" or "altruistic" motives are inconsistent with money-maximizing Nash equilibria. This paper asks whether this apparently unselfish behavior is at all consistent with some well-behaved preference ordering other than money-maximization. We do this by checking whether choices of subjects are consistent with standard axioms of revealed preferences, such as SARP and GARP. Further, we estimate utility functions that could generate the data and then use these estimates to predict data from outside our experiment. This neoclassical approach to altruism works well and provides a foundation for a preference-based approach to altruism and fairness.
9903 EVOLUTIONARILY STABLE MIXED STRATEGIES IN ASYMMETRIC GAMES Binmore, Ken and Larry Samuelson (February 8, 1999)See #9903R.
9904 WHAT MAKES AN ALLOCATION FAIR? SOME EXPERIMENTAL EVIDENCE Andreoni, James, Paul M. Brown and Lise Vesterlund (February 1999)We explore fairness by considering three two-person public goods games with identical Nash equilibria, but with different rules of the game and different payoff possibilities. We find that while these changes in rules and off-the-equilibrium-path payoffs do not affect the selfish Nash equilibrium, they do affect the choices the subjects make. Moreover, the equilibrium prediction fails even though incentives off the equilibrium enforce it. We show that fairness is a function of more that just the final allocations of subjects, but depends on the actions that were not chosen as well as those that are. Exploring existing models of fairness, we identify that while all models of fairness can capture aspects of behavior, none is complete. We end with a road map for building a more predictive model of fairness.
9905 ECOLOGICAL AND SOCIAL DYNAMICS IN SIMPLE MODELS OF ECOSYSTEM MANAGEMENT Brock, William A., Steve. R. Carpenter and Paul . C. Hanson (Jan. 27, 1999)Simulation models were developed to explore and illustrate dynamics of socio-ecological systems. The ecosystem is a lake subject to phosphorus pollution. Phosphorus flows from agriculture to upland soils, to surface waters where it cycles between water and sediments. The ecosystem is multistable, and moves among domains of attraction depending on the history of pollutant inputs. The alternative states yield different economic benefits. Agents form expectations about ecosystem dynamics, markets, and/or the actions of managers, and choose levels of pollutant inputs accordingly. Agents have heterogeneous beliefs and/or access to information. Their aggregate behavior determines the total rate of pollutant input. As the ecosystem changes, agents update their beliefs and expectations about the world they co-create, and modify their actions accordingly. For a wide range of scenarios, we observe irregular oscillations among ecosystem states and patterns of agent behavior. These oscillations resemble some features of the adaptive cycle of panarchy theory.
9906 MULTILATERAL TRADE NEGOTIATIONS, BILATERAL OPPORTUNISM AND THE RULES OF GATT Bagwell, Kyle and Robert W. Staiger (March 1999)Trade negotiations occur through time and between the governments of many countries. An important issue is thus whether the value of concessions that a government wins in a current negotiation may be eroded in a future bilateral negotiation to which it is not party. In the absence of rules that govern the bilateral negotiation, we first show that the potential for opportunistic bilateral agreements is indeed severe. We next identify rules of negotiation that serve to protect the welfare of governments that are not participating in the bilateral negotiation. The "reciprocal market access" rule ensures that the market access of a non-participating country is unaltered, and we show that this rule eliminates the potential for opportunistic bilateral negotiations. This rule, however, has practical limitations, and so we next consider the negotiation rules that are prominent in GATT practice and discussion. Our main finding is that the two central rules of GATT - non-discrimination (MFN) and reciprocity - effectively mimic the reciprocal market access rule, and therefore offer a practical means through which to protect non-participant welfare and thereby eliminate the potential for opportunistic bilateral negotiations.
9907 TESTING FOR LINEARITY (March 1999) Hansen, Bruce E.The problem of testing for linearity and the number of regimes in the context of self exciting threshold autoregressive (SETAR) models is reviewed. We describe least-squares methods of estimation and inference. The primary complication is that the testing problem in non-standard, due to the presence of parameters which are only defined under the alternative, so the asymptotic distribution of the test statistics is non-standard. Simulation methods to calculate asymptotic and bootstrap distributions are presented. As the sampling distributions are quite sensitive to conditional heteroskedasticity in the error, careful modeling of the conditional variance is necessary for accurate inference on the conditional mean. We illustrate these methods with two applications - annual sunspot means and monthly U.S. industrial production. We find that annual sunspots appear to be a SETAR(3) process and industrial production a SETAR(2) process.
9908 COMPLEXITY-BASED METHODS IN CYCLES AND GROWTH: ANY POTENTIAL VALUE-ADDED? Brock, William A. (January 1999)No Abstract.
9909 TECHNOLOGY (AND POLICY) SHOCKS IN MODELS OF ENDOGENOUS GROWTH Jones, Larry E., Rodolfo E. Manuelli and Ennio Stacchetti (March 1999)Is there a trade-off between fluctuations and growth? The empirical evidence is mixed, with some studies (Kormendi and Meguire (1985)) finding a positive relationship, while others (Ramey and Ramey (1995)) finding a negative one. Our objective in this paper is to understand how fundamental uncertainty can affect the long run growth rate, and what are the factors that determine the nature (positive or negative) of the relationship.
Qualitatively, we show that the relationship between volatility in fundamentals and policies and mean
growth can be either positive or negative. We identify the curvature of the utility function as a key parameter that
determines the sign of the relationship. Quantitatively, we find that when we move from a world of perfect certainty
to one with uncertainty that resembles the average uncertainty in a large sample of countries, growth rates increase
somewhere between 0.17% and 0.80%, with 0.20% being a "reasonable" estimate. Even though these are nontrivial
changes, they are not large enough by themselves to account for the large differences in mean growth rates observed
in the data. However, we find that differences in the curvature of preferences have very substantial effects on the
estimated variability of stationary objects like the consumption/output ratio and hours worked. For this reason, we
expect that the models considered in this paper will provide the basis of sharp estimates of the curvature parameter.
Download WP#9909 in pdf.
9910 INTERACTIONS-BASED MODELS Brock,William A. and Steven N. Durlauf (revised January 27, 2000)For abstract of revised version, see Publications List August 2000.
9911 WHITHER NONLINEAR? Brock, William A. (December 18, 1997)No abstract.
[Forthcoming (1999) in the Journal of Economic Dynamics and Control]
9912 SCALING IN ECONOMICS: A READER'S GUIDE Brock, William A. (March 18, 1999)No abstract.
[Forthcoming (1999) in Industrial and Corporate Change]
9913 HOW CAN STATISTICAL MECHANICS CONTRIBUTE TO SOCIAL SCIENCE? Durlauf, Steven N. (April 4, 1999)This paper describes a model of interdependent decision making which has been developed to understand group differences in behaviors such as nonmarital fertility, school attendance, and drug use. These behaviors have in common a plausible dependence on peer group and related influences. The mathematical structure of the model is an example of the sorts of structures routinely studied in statistical mechanics. This suggest that the statistical mechanics literature may be able to yield a number of useful tools for the study of socioeconomic phenomena.
9914 AFFIRMATIVE ACTION IN A COMPETITIVE ECONOMY Moro, Andrea and Peter Norman (revised April 2000)We consider a model of endogenous human capital formation with competitively determined wages. In the presence of two distinguishable, but ex ante identical groups of workers, we show that discrimination is sustainable in equilibrium, even if the corresponding model with a single group of workers has a unique equilibrium. An affirmative action policy consisting of a quota may "fail" in the sense that there still may be equilibria where groups are treated differently. However, the incentives to invest for agents in the discriminated group are improved by affirmative action if the initial equilibrium is the most discriminatory equilibrium in the model without the policy. The welfare effects are ambiguous. We demonstrate that it is possible that the policy makes the intended beneficiaries worse off: even if the starting point is the most discriminatory equilibrium the expected payoff may decrease for all agents in the target group.
9915 MARKOV EVOLUTION WITH INEXACT INFORMATION Sandholm, William H. (April 23, 1999)This paper has been revised. The new title is Evolution and Equilibrium under Inexact Information, revised June 1, 2000. Download WP#9915R in pdf.
9916 STATISTICAL DISCRIMINATION AND EFFICIENCY Norman, Peter (revised June 2000)This paper addresses a fundamental, yet unresolved, question: is statistical discrimination a market failure? I contrast a competitive model of statistical discrimination with the allocation chosen by a social planner who must respect the same informational and technological constraints as the firms in the decentralized model. Equilibria are always contrained inefficient due to "free riding" in human capital investments, but this market failure is present also when the market coordinates on an equilibrium without discrimination and does not mean that statistical discrimination is inefficient as a phenomenon. On the contrary, there are efficiency gains from discrimination in terms of reduced "mismatch" between workers and jobs. Whether the solution to the planning problem involves discrimination depends on the trade-off between the informational gains of specialization and the losses in terms of increased investment costs.
9917 IS FREE TRADE GOOD FOR THE ENVIRONMENT? Antweiler, Werner, Brian R. Copeland and M. Scott Taylor (May 10, 1999)This paper sets out a theory of how openness to international goods markets affects pollution concentrations. We develop a theoretical model to divide trade's impact on pollution into scale, technique and composition effects and then examine this theory using data on sulfur dioxide concentrations from the Global Environment Monitoring Project. We find international trade creates relatively small changes in pollution concentrations when it alters the composition, and hence the pollution intensity, of national output. Our estimates of the associated technique and scale effects created by trade imply a net reduction in pollution from these sources. Combining our estimates of scale, composition and technique effects yields a somewhat surprising conclusion: freer trade appears to be good for the environment.
9918 PRE-PLAY CONTRACTING IN THE PRISONERS' DILEMMA Andreoni, James and Hal Varian (April 1999)We consider a modified Prisoners' Dilemma game in which each agent can offer to pay the other agent to cooperate. The subgame-perfect equilibrium of this two-stage game is Pareto efficient. We examine experimentally whether subjects actually manage to achieve this efficient outcome. We find an encouraging level of support for the mechanism, but also find that subjects' tastes for cooperation and equity interact significantly with the incentives of the mechanism.
9919 CHARITABLE GIVING BY MARRIED COUPLES: WHO DECIDES AND WHY DOES IT MATTER? Andreoni, James, Eleanor Brown and Isaac Rischall (May 1999)We examine how charitable giving is influenced by who in the household is primarily responsible for giving decisions. Looking first at single-person households, we find men and women to have significantly different tastes for giving, setting up potential conflict for married couples. We find that, with respect to total giving, married households tend to resolve these conflicts largely in favor of the husband's preferences. However, when the woman is the decision maker, she will make a significantly different allocation of those charity dollars, preferring to give to more charities but to give less to each. We find our results give new insights into both issues of charitable giving and household decision making.
9920 ESTIMATION WITH RESPONSE ERROR AND NON-RESPONSE: FOOD STAMP PARTICIPATION IN SIPP Bollinger, Christopher R. and Martin H. David (June 1999)Error in survey data originates from failure to contact the sample and from false answers to verifiable questions. These errors may be systematic and associated with uncooperative or unreliable respondents. Zabel (1995) models attrition in the Survey of Income and Program Participation and finds systematic demographic and design effects. Bollinger and David (1997) model response error and identify correlations to income per capita. In this analysis we link missing interviews in a panel and response error through a tri-variate probit analysis. Robustness of the correlation between attrition and response error is examined by comparing variants of the model. The joint model of response error and attrition becomes the first stage of a pseudo-likelihood estimate a model of Food Stamp participation. The model is significantly different that naive probit on the survey data.
9921 TESTS FOR FORECAST ENCOMPASSING WHEN FORECASTS DEPEND ON ESTIMATED REGRESSION PARAMETERS West, Kenneth D. (June 1999)This paper presents analytical and simulation results on the properties of two tests for forecast encompassing, allowing throughout for dependence of the forecasts on estimated regression parameters. One test, which was intended for forecasts that do not depend on regression parameters, was developed by Harvey, Leybourne and Newbold (1998). This test works relatively well when the size of the sample of forecast errors is small. A second test, which explicitly accounts for uncertainty about the regression parameters, otherwise is comparable or preferable.
9922 SPENDTHRIFT IN AMERICA? ON TWO DECADES OF DECLINE IN THE U.S. SAVING RATE Parker, Jonathan A. (June 1999)During the past two decades, the personal saving rate in the United States has fallen from eight percent to below zero. This paper demonstrates that this change represents a major shift in the allocation of newly produced goods. The share of GDP that households consume rose by 6 percentage points since 1980. This increase occurred concurrently with a reduction in the growth rate of real consumption spending per person, high real rates of return, and an increasing ratio of aggregate wealth to income. Despite this last fact, wealth changes can explain little of the boom in consumption spending. The largest increases in national wealth post-date the consumption boom and households with different wealth levels have similar increases in consumption. The paper also finds that the changing age distribution of the U.S. population does not explain the consumption boom. While it may be that new wealthier cohorts are driving this boom, the preponderance of evidence suggest rather that the rising consumption to income ratio is due to a common time effect. The main findings of the paper are consistent with either an increase in the discount rate or with a general belief in better economic times in the future. Alternatively, the low rates of saving could be due to a combination of factors such as the increase in intergenerational transfers from the Social Security system raising the consumption of the elderly and an increase in access to credit and expanded financial instruments raising the consumption of the young.
9923 POTENTIAL GAMES WITH CONTINUOUS PLAYER SETS Sandholm, William H. (July 7, 1999)We study potential games with continuous player sets, a class of games characterized by an externality symmetry condition arising naturally in models of network congestion. We offer a simple description of equilibria which are locally stable under a broad class of evolutionary dynamics, and prove that behavior converges to equilibrium from all initial conditions. We propose a subclass of potential games in which evolution leads to efficient play. Finally, we show that the games studied here are the limits of convergent sequences of the finite player potential games studied by Monderer and Shapley (1996).
9924 DOMESTIC POLICIES, NATIONAL SOVEREIGNTY AND INTERNATIONAL ECONOMIC INSTITUTIONS Bagwell, Kyle and Robert W. Staiger (July 1999)To what extent must nations cede control over their economic and social policies if global efficiency is to be achieved in an interdependent world? This question is at the center of the debate over the future role of GATT (and its successor, the WTO) in the realm of labor and environmental standards. Current GATT rules reflect the primacy of market access concerns in GATT practice, and this orientation is seen increasingly as unfriendly to labor and environmental causes. Fundamental changes to GATT are being considered as a result, changes that would expand the scope of GATT negotiations to include labor and environmental policies, and would lead to a significant loss of sovereignty for national governments. In this paper we establish that there is no need for the WTO to expand the scope of its negotiations in this way. We show instead that the market access focus of current GATT rules is well-equipped to handle the problems associated with choices over labor and environmental standards, and that with relatively modest changes that grant governments more sovereignty, not less, these rules can in principle deliver globally efficient outcomes.
9925 MANAGED CARE INCENTIVES AND INPATIENT COMPLICATIONS Haile, Philip A. and Rebecca M. Stein (July 1999)The rising market shares of managed care organizations are due in part to their ability to control costs through restrictions on patient access to specialized services, oversight of treatment practices, and financial incentives for providers. We examine the effects of these measures on the quality of care patients received by studying the frequency of in-hospital complications. This outcome measure has the advantages of relatively high frequency and sensitivity to variations in care for a wide range of patient types. We find significant differences in complication rates between managed care and fee-for-service patients in several treatment categories. We investigate the sources of this variation by comparing complication rates for patients with different types of managed care coverage and patients treated in different hospitals. The differences in outcomes we find appear to arise not from differential treatment of patients within hospitals but from variations in care across hospitals that tend to treat different types of patients.