This paper tests the separation of farm labor supply and labor demand decisions, using the observation that household composition is an important determinant of farm labor use with nonseparation. After assessing the conditions under which the test has power against several alternatives, an empirical model is developed to test the proposition that farm employment is independent of family composition. The model is estimated on a data set from rural Java. The null hypothesis that farm labor allocation decisions are independent of household structure is not rejected. The results are robust to different specifications of the labor demand function. Copyright 1992 by The Econometric Society.
The authors show that the CUSUM test of the stability over time of the coefficients of a linear regression model, which is usually based on recursive residuals, can also be applied to ordinary least squares residuals. The authors derive the limiting null distribution of the resulting test and compare its local power to that of the standard procedure. It turns out that neither version is uniformly superior to the other. Copyright 1992 by The Econometric Society.
Suppose two agents play a game, each using a computable algorithm to decide what to do, these algorithms being common knowledge. The author shows that it is possible to act rationally provided he limits his attention to a natural subset of solvable games and to opponents who use rational algorithms; the outcome is a Nash equilibrium. Going further, the author shows that rationality is possible on many domains of games and opposing algorithms but each domain requires a particular solution algorithm; no one algorithm is rational on all possible domains. Copyright 1992 by The Econometric Society.
This paper considers the effect of an airline's scale of operation at an airport on the profitability of routes flown out of that airport. The empirical methodology uses the entry decisions of airlines as indicators of underlying profitability; the results extend the empirical literature on airport presence by providing a new set of estimates of the determinants of city-pair profitability. These estimates imply that city-pair profits increase in airport presence and decrease rapidly in the number of entering firms. The literature on empirical models of oligopoly entry is also extended via a focus on the role of differences between firms. Copyright 1992 by The Econometric Society.
The authors investigate the implementation of social choice functions that map to lotteries over alternatives. They require virtual implementation in iteratively undominated strategies. Under very weak domain restrictions, they show that if there are three or more players, any social choice function may be so implemented. The literature on implementation in Nash equilibrium and its refinements is compromised by its reliance on game forms with unnatural features (for example, "integer games") or "modulo" constructions with mixed strategies arbitrarily excluded. In contrast, the authors' results employ finite (consequently "well-behaved") mechanisms and allow for mixed strategies. Copyright 1992 by The Econometric Society.
This paper provides an extension of Savage's subjective expected utility theory for decisions under uncertainty. It includes in the set of events both unambiguous events for which probabilities are additive as well as ambiguous events for which probabilities are permitted to be nonadditive. The main axiom is cumulative dominance which adapts stochastic dominance to decision making under uncertainty. We derive a Choquet expected utility representation and show that a modification of cumulative dominance leads to the classical expected utility representation. The relationship of our approach with that of Schmeidler who uses a two-stage formulation to derive Choquet expected utility is also explored.
This paper develops a two-sector overlapping-generations model. It characterizes the dynamical system globally and establishes sufficient conditions for the existence of a globally unique perfect-foresight equilibrium. It provides, therefore, a useful framework for global dynamic analysis of phenomena whose modeling requires a multidimensional commodity space. The analysis demonstrates that gross substitutability in consumption is not sufficient for the determinacy of equilibrium in this production economy. However, if in addition the investment good is capital intensive and second period consumption of two-period-lived individuals is a normal good, then the perfect-foresight equilibrium is globally unique. Copyright 1992 by The Econometric Society.
For each two-player game, a linear-programming algorithm finds a component of the Nash equilibria and a subset of its perfect equilibria that are simply stable in the sense that there are nearby equilibria for each nearby game that perturbs one strategy's probability or payoff more than others. Copyright 1992 by The Econometric Society.
WE ARE MOST GRATEFUL to Glazer and Rosenthal for the attention they have paid to our work (Abreu and Matsushima (1992a, b, c)). In the process of criticizing our mechanism, they have provided an elegant exposition of it which usefully supplements our own efforts. The criticisms themselves we feel are misplaced, and based on a close reading but narrow interpretation of our results. Glazer and Rosenthal seek to show that in our mechanisms .. . the iterative removal of strictly dominated strategies is (or indeed ought to be) controversial. In terms of conventional decision theory the iterative logic is impeccable. When iterative deletion leads to a unique profile, that profile is the unique rationalizable profile, the unique Nash equilibrium, and so on. Of course, the logic of iterative dominance entails common knowledge of rationality. The theoretical coherence of this assumption has been questioned in the context of backward programming in extensive form games (see Luce and Raiffa (1957, pp. 80-81), Rosenthal (1981), Basu (1988), Reny (1992a, 1992b), Bonanno (1991), Binmore (1987a, 1987b), and Gul (1989) among others). These paradoxes of common knowledge of rationality have been highlighted in stylized examples such as the finitely repeated prisoners' dilemma and Rosenthal's centipede which in fact has been a seminal inspiration for this recent literature.2 But our mechanisms are simultaneous. There is no opportunity to demonstrate irrationality, strategic or otherwise, and therefore no scope to rationalize iteratively dominated behavior. From a decision theory perspective, the Glazer and Rosenthal critique might therefore be viewed as an elaborate revival of the (indefensible) claim that players in a one-short prisoners' dilemma will choose not to confess because they are both better off doing so than by both playing their dominant strategies. Within the standard game theory paradigm there is really nothing more to be said. Before turning to issues of bounded rationality, we note that the Glazer and Rosenthal critique is essentially premised on the existence of a countervailing focal point. But what is a focal point? The notion is notoriously vague, and we are aware of no widely accepted definition.3 This is not to deny that in very simple and particular games, certain behavior may be focal. Frequently, focalness is identified with a Pareto dominating equilibrium, and this is the point of view Glazer and Rosenthal seem to adopt.4 This is implicit in their acknowledgement that ... . when the social choice function does satisfy Pareto optimality, our objection loses much of its immediate
David Heath, Robert Jarrow, Andrew Morton, Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation, Econometrica, Vol. 60, No. 1 (Jan., 1992), pp. 77-105