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
9702R AUCTIONS WITH RESALE MARKETS: AN APPLICATION TO U.S. FOREST SERVICE TIMBER SALES Haile, Philip A. (revised September 18, 1998)A model of auctions with asymmetric information and a resale opportunity is applied to U.S. Forest Service sales of timber harvesting contracts. Long contract terms create an opportunity for specialized sawmills to receive new information regarding their idiosyncratic values for a contract between its sale and the actual harvest. Because subcontracting and contract transfers are possible, rational bidding should reflect the presence of a resale market where the resulting ex post gains to trade can be exploited. In particular, the model predicts that bidders' valuations will vary with the magnitudes of the option values that the resale market provides to both winners and losers of the auction. The empirical evidence, obtained from a structural model which nests both the null and alternative hypotheses, supports this prediction and rejects standard models. Because resale opportunities can fundamentally alter equilibrium bidding and optimal selling strategies, this evidence has important implications for empirical analysis and policy in many other applications. Download WP#9702R in PDF.
9804R HOW COSTLY IS THE HONEST SIGNALING OF NEED? (previous title: Signaling of Need: Parent Fitness Losses Determine Offspring Costs) Noldeke, Georg and Larry Samuelson (revised August 10, 1998)Summary: ESS models of biological signaling have shown that costly signals can provide honest information. In the context of parent-offspring conflict over the allocation of resources by parents to their young, the theory explains costly offspring solicitation behavior as an accurate signal of offspring need to parents who cannot assess offspring condition directly. In this paper, we provide a simple but general characterization of the honest signaling of need in models of parent- offspring conflict: the offspring's signaling cost is proportional to the parent's fitness loss from satisfying the offspring's resource requirement. The factor of proportionality is given by a measure of the extent of parent-offspring conflict that depends only on coefficients of relatedness. These results hold for interbrood conflict with uniparental investment even if the relationship between offspring condition and resource requirement is not monotonic, and extend to cases of biparental care, uncertainty concerning the parent's condition, and intra-brood conflict. Download WP#9804R in PDF.
9817 OPTIMAL MANAGEMENT IN TILMANIA: A COMPETITIVE SPECIES ASSEMBLY CONSTRAINED BY A LIMITING FACTOR (running title: Optimal Management in Tilmania) Brock, Willam A. and Anastasios Xepapadeas (August 1998)Resource-based models of species competition predict that when species compete for a limiting resource in a homogenous habitat, then the equilibrium outcome is a monoculture with the species characterized by the lowest resource requirement outcompeting all the rest. We derive harvesting rules for a habitat that maximize the utility flows generated from consumption activities of the harvested species, and from nonconsumptive activities associated with utility generated from positive species biomass. Under the harvesting rules the maximal desired biodiversity is preserved in the long-run equilibrium assembly. Our harvesting rule at the steady state corresponds to a golden biodiversity rule. The equilibrium assembly is characterized by a 'strong resilience principle' in both deterministic and stochastic environments, indicating that irrespective of the initial state of the assembly, the system tends to the steady state where full biodiversity is preserved. Download WP#9817 in PDF.
9818 YOUR REPUTATION IS WHO YOU'RE NOT, NOT WHO YOU'D LIKE TO BE Mailath George J. and Larry Samuelson (August 10, 1998)We construct a model in which a firm's reputation must be built gradually, is managed, and dissipates gradually unless appropriately maintained. Consumers purchase an experience good from a firm whose unobserved effort affects the probability distribution of consumer utilities. Consumers observe private, noisy signals (consumer utilities) of the behavior of the firm, yielding a game of imperfect private monitoring. The standard approach to reputations introduces some "good" or "Stackelberg" firms into the model, with consumers ignorant of the type of the firm they face and with ordinary firms acquiring their reputations by masquerading as Stackelberg firms. In contrast, the key ingredient of our reputation model is the continual possibility that the ordinary or "competent" firm might be replaced by a "bad" or "inept" firm who never chooses the Stackelberg action. Competent firms then acquire their reputations by convincing consumers that they are not inept. Building a reputation is an exercise in separating oneself from inept firms who one is not, rather than pooling with the Stackelberg firms who one would like to be. We investigate how a firm manages such a reputation, showing , among other features, that a competent firm may not always choose the most efficient effort level to distinguish itself from an inept one.
Journal of Economic Literature Classification number: C70.
Keywords: Reputation, incomplete information, Stackelberg types, commitment types.
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9819 WHO WANTS A GOOD REPUTATION? Mailath George J. and Larry Samuelson (August 17, 1998)We examine a market in which firms confront a moral hazard problem in the provision of product quality, facing a short-term incentive to produce low quality but potentially earning higher profits from "committing" to high quality. There are two types of firms in the market, "inept" firms who can produce only low quality, and "competent" firms who have a choice between high and low quality. Firms occasionally leave the market, causing competent and inept potential entrants to compete for the right to inherit the departing firm's reputation. In a repeated interaction, with consumers receiving noisy signals of product quality, competent firms choose high quality in an attempt to distinguish themselves from inept firms. Competent firms find average reputations most valuable, in the sense that a competent firm is most likely to enter the market by purchasing an average reputation in the hopes of building it into a good reputation, than either a very low reputation or a very high reputation. Inept firms, in contrast, find it profitable to either buy high reputations and deplete them or buy low reputations. Download WP#9819 in PDF.
9820R COORDINATED ACTION IN THE ELECTRONIC MAIL GAME Binmore, Ken and Larry Samuelson (August 25, 1998; revised September 30, 1998)This paper examines a version of Rubinstein's Electronic Mail Game, or the coordinated attack problem, in which the noisy communications technology is voluntary and costly. Multiple Nash equilibria exist, including an equilibrium in which messages are ignored, and an equilibrium in which only one message is sent, allowing the informed player to reveal the state of nature and leading to coordination on the relevant action whenever this message arrives. The equilibrium in which messages are ignored altogether is eliminated by an appropriate evolutionary stability condition. The remaining equilibria survive this criterion, including the equilibrium in which only one message is sent as well as equilibria in which longer strings of messages are exchanged.
Journal of Economics Literature Classification numbers: C70, C78.
Keywords Electronic Mail Game, Coordinated attack problem, Communication, Evolutionary stable strategy.
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9821 OPTIMAL STRUCTURE OF AGENCY WITH PRODUCT COMPLEMENTARITY AND SUBSTITUTABILITY Severinov, Sergei (November 15, 1997)The paper investigates a typical situation that arises in procurement, regulation or sub-contracting. A principal needs to obtain two different inputs which she can use in any positive amounts and in any proportion. Inputs are produced by agents who have private information about their costs. The paper studies a set of conditions determining the choice between a single-agent mechanism (one agent producing both inputs) and a two-agent mechanism (each agent producing a different input). An optimal mechanism is characterized in each of these cases. In the two-agent case, it is a combination of interdependent one-dimensional mechanisms, while in the single-agent case the mechanism is multi (two)-dimensional. It is shown that when the inputs are (weakly) complementary in the principal's benefit function, a single-agent mechanism is superior, unless the production costs of the two inputs are distributed over sufficiently asymmetric supports. If they are substitutes, then either mechanism can be optimal depending on the degree of substitutability (the appropriate measure of which is derived in the paper), and the frequency of efficient types in the population. Download WP#9821 in PDF.
9822 DEMAND UNCERTAINTY, ENDOGENOUS TIMING AND COSTLY WAITING: JUMPING THE GUN IN COMPETITIVE MARKETS Deneckere, Raymond and James Peck (October 1998)We demonstrate a new coordination failure in a general equilibrium model where the set of active consumers is random and consumers choose when to access the market. Consumers face a cost of transacting early, yet we show the existence of competitive equilibria in which inefficient early transactions occur. This coordination failure is impossible when the number of active consumers is known. Download WP#9822 in PDF.
9823 RATIONAL ANIMAL SPIRITS Brock, William A. and Cars H. Hommes (October 1998),No abstract.
9824 BEHAVIOR-GENETIC MODELING OF TWINS: A DECONSTRUCTION Goldberger, Arthur S. and Leon J. Kamin (November 1998)This paper focuses on the Swedish Adoption/Twin Study of Aging (SATSA) as representative of present- day behavior genetic research. In the scope of its design, incorporating both twins reared together and twins reared apart, in its use of modeling procedures, and in the quantity of the data it has collected, SATSA claims pride of place in contemporary behavior genetics. The criticisms which we make of SATSA are widely applicable to other studies.
Our paper consists of two parts. The first discusses problems having to do with the collection, and the reporting, of SATSA's data; similar problems, as we shall indicate, arise in other behavior genetic studies. The second discusses ambiguities, inadequacies, and errors involved in the application of models to twin and adoption data, and in the interpretation of model-fitting exercises. Download WP#9824 in PDF.
9825 MANAGEMENT OF EUTROPHICATION FOR LAKES SUBJECT TO POTENTIALLY IRREVERSIBLE CHANGE Brock, W. A., S.R. Carpenter, and D. Ludwig (October 23, 1998)We analyze management policies for ecosystems subject to alternate states, thresholds, and irreversible changes. We focus on the problem of lake eutrophication by excessive P input. Eutrophic lakes may be classified, with respect to their response to reduced P input alone, as reversible (recovery is immediate and proportional to the reduction in P input), hysteretic (recovery requires extreme reductions in P input for a period of time), or irreversible (recovery cannot be accomplished by reducing P input alone). A model with one state variable and one control variable describes the responses of lake trophic state to changes in P input and other management interventions. Activities that generate P input to the lake are assumed to create profits, while the value of ecosystem services provided by the lake declines at high P levels. We then calculate P input policies that maximize the discounted net benefits from polluting activities and ecosystem services. If "optimality" is defined as maximizing this discounted criterion, then analyses based on deterministic lake dynamics usually lead to higher P input rates than analyses that assume various kinds of variability, such as: inputs are affected by stochastic factors such as weather, policy is implemented with lags, or parameters of the limnological model are uncertain. In reality, all of these complications occur. Therefore, if maximum economic benefit is the goal of lake management, P input targets should be reduced below levels derived from traditional deterministic models. This pattern may apply to other situations where diffuse pollution causes nonlinear changes in the ecosystem state, such as the greenhouse effect or acid deposition. Download WP#9825 in PDF.
9826 THE GRID BOOTSTRAP AND THE AUTOREGRESSIVE MODEL Hansen, Bruce E. (August 1998)A "grid" bootstrap method is proposed for confidence interval construction, which has improved performance over conventional bootstrap methods when the sampling distribution depends upon the parameter of interest. The basic idea is to calculate the bootstrap distribution over a grid of values of the parameter of interest, and form the confidence interval by the no-rejection principle. Our primary motivation is given by autoregressive models, where it is known that conventional bootstrap methods fail to provide correct first-order asymptotic coverage when an autoregressive root is close to unity. Simulation results show that the grid bootstrap provides an important improvement over conventional methods. Download WP#9826 in PDF.
9827 THRESHOLD AUTOREGRESSION WITH A NEAR UNIT ROOT Caner, Mehmet and Bruce E. Hansen (December 1998)This paper develops an asymptotic theory of inference for an unrestricted two-regime threshold autoregressive (TAR) model with an autoregressive root which is local-to-unity. We find that the asymptotic null distribution of the Wald test for a threshold is non-standard and mildly dependent on the local-to-unity coeffficient, and suggest basing inference on a bootstrap approximation. We also study the asymptotic null distribution of the Wald test for an autoregressive unit root, and find that it is non-standard and dependent on the presence of a threshold effect. We propose both asymptotic and bootstrap-based tests. These tests and distribution theory allow for the joint consideration of non-linearity (thresholds) and non-stationary (unit roots).
Our limit theory is based on a new set of tools which combine unit root asymptotics with empirical process methods. We work with a particular two-parameter empirical processes which converges weakly to a two-parameter Brownian motion. Our limit distributions involve stochastic integrals with respect to this two-parameter process. This theory is entirely new and may find applications in other contexts.
We illustrate the methods with an application to the U.S. monthly unemployment rate. We find strong evidence of a threshold effect. The point estimates suggest that in about 80% of the observations, the regression function is close to a driftless I(1) process, and in the other 20% of the observations, the regression function is mean-reverting. While the conventional ADF test for a unit root is quite insignificant, our TAR unit root test is arguably significant, with a bootstrap p-value near 5%, suggesting that the unemployment rate follows a stationary TAR process. Download WP#9827 in PDF.
9828 THE EVOLUTION OF PREFERENCES AND RAPID SOCIAL CHANGE Sandholm, William H. (December 17, 1998)We present a dynamic analysis of the evolution of preferences in a strategic environment. In our model, each agent's behavior depends upon both the game's payoffs and his idiosyncratic biases, but only the game's payoffs determine his evolutionary success. We establish the existence and uniqueness of the paired trajectories of the distribution of preferences and aggregate behavior. Furthermore, we show that while in equilibration games, aggregate behavior changes smoothly, in coordination games, behavior often adjusts discontinuously, jumping discretely in an instant of evolutionary time. We apply our results to a model of technology adoption, showing why the establishment of technological standards is often punctuated by sudden shifts in market share. Download WP#9828 in PDF.
9829 A SIMPLIFIED APPROACH TO COMPUTING EFFICIENCY BOUNDS IN SEMIPARAMETRIC MODELS Severini, Thomas and Gautam TripathiUsing some standard Hilbert space theory, a simplified approach to computing efficiency bounds in semiparametric models is presented. Nine interesting examples are used to illustrate this approach. Download WP#9829 in PDF.
9830 PARTIAL POOLING AT THE RESERVE PRICE IN AUCTIONS WITH RESALE OPPORTUNITIES Haile, Philip A.Two features common to many auctions are the use of reserve prices and the existence of secondary markets for the good being sold. Even in very simple symmetric settings, the combination of these features can preclude existence of an equilibrium in separating bidding strategies. A symmetric equilibrium may still exist, with an interval of types pooling at the reserve price and bids strictly increasing in types otherwise. However, this equilibrium exists only if the reserve price is not too high, ruling out some reserve prices strictly below the maximum valuation. To set an optimal reserve price the seller must know not only the joint distribution function governing bidders' information before and after the auction, but also how gains to trade are divided in the secondary market. Download WP#9830 in PDF.
465
Andreoni, James, Brian Erard and Jonathan Feinstein
TAX COMPLIANCE
Journal of Economic Literature, Vol. XXXVI, June 1998, pp. 818-860.
466
Brock, William A. and Cars H. Hommes
HETEROGENEOUS BELIEFS AND ROUTES TO CHAOS IN A SIMPLE ASSET PRICING MODEL
Journal of Economic Dynamics and Control, Vol. 22, 1998, pp. 1235-1274.