Knowledge that Transforms

In this paper, Markov chain Monte Carlo sampling methods are exploited to provide a unified, practical likelihood-based framework for the analysis of stochastic volatility models. A highly effective method is developed that samples all the unobserved volatilities at once using an approximating offset mixture model, followed by an importance reweighting procedure. This approach is compared with several alternative methods using real data. The paper also develops simulation-based methods for filtering, likelihood evaluation and model failure diagnostics. The issue of model choice using non-nested likelihood ratios and Bayes factors is also investigated. These methods are used to compare the fit of stochastic volatility and GARCH models. All the procedures are illustrated in detail.

I study alternating-offer bargaining games with two-sided incomplete information about the players' discount rates. For both perfect Bayesian equilibrium and a rationalizability-style notion, I characterize the set of expected payoffs which may arise in the game. I also construct bounds on agreements that may be made. The set of expected payoffs is easy to compute and incorporate into applied models. My main result is a full characterization of the set of perfect Bayesian equilibrium payoffs for games in which the distribution over the players' discount rates is of wide support, yet is in a weak sense close to a point mass distribution. I prove a lopsided convergence result: each player cannot gain from a slight chance that she is a strong type, but the player can suffer greatly if there is a slight chance that she is a weak type.

We examine the interactions between different institutional arrangements in a general equilibrium model of a modernizing economy. There is a modern sector, where productivity is high but information asymmetries are large, and a traditional sector where productivity is low but information asymmetries are small. Consequently, agency costs in the modern sector make consumption lending difficult, while such lending is readily done in the traditional sector. The resulting trade-off between credit availability and productivity implies that not everyone will move to the modern sector. In fact, the laissez-faire level of modernization may fail to maximize net social surplus. This situation may also hold in the long run: in a dynamic version of the model, a “trickle-down” effect links the process of modernization with reduction in modern sector agency costs. This effect may be too weak and the economy may get stuck in a trap and never fully modernize. The two-sector structure also yields a natural theoretical testing ground for the Kuznets inverted-U hypothesis: we show that even within the “sectoral shifting” class of models, this phenomenon is not robust to small changes in model specification.

This paper provides a consistent and asymptotically normal estimator for the intercept of a semiparametrically estimated sample selection model. The estimator uses a decreasingly small fraction of all observations as the sample size goes to infinity, as in Heckman (1990). In the semiparametrics literature, estimation of the intercept has typically been subsumed in the nonparametric sample selection bias correction term. The estimation of the intercept, however, is important from an economic perspective. For instance, it permits one to determine the “wage gap” between unionized and nonunionized workers, decompose the wage differential between different socioeconomic groups (e.g. male-female and black-white), and evaluate the net benefits of a social programme.

This paper analyses the sustainability of inter-generational transfers in Samuelson's consumption-loan model when agents are imperfectly informed about past events. We find that with mild informational constraints, transfers cannot be supported by pure-strategy equilibria. Mixed strategies allow transfers to be sustained even if agents have little information, so that a version of the Folk theorem holds. However, these equilibria are not robust. If each agent's utility function is subjected to a small random perturbation as in Harsanyi (1973), these mixed strategy equilibria unravel, and only the zero-transfer allocation survives as the unique rationalizable outcome. This result is an example of mixed strategy equilibrium of an extensive form game which cannot be purified.

Arrangements for achieving efficient risk-sharing vary depending on the information available to agents in the economy. The usual Euler equation restricts efficient allocations in an economy which obeys the permanent income hypothesis, while efficient allocations in an economy with private information and long-term contracts satisfy a symmetric restriction, but not the Euler equation. Full insurance arrangements are unique in that they satisfy both restrictions. We look at an environment in which it seems likely that long-term contracts play a role in mitigating the effects of private information: three village economies in South India. The evidence that consumption allocations satisfy the private information restriction is quite strong for households in two of the three villages; the evidence for the third village suggests that while consumption for some households satisfies the private information restrictions, other households' consumption obey the permanent income hypothesis.

When payoffs from different actions are unknown, agents use their own past experience as well as the experience of their neighbors to guide their decision making. In this paper, the authors develop a general framework to study the relationship between the structure of these neighborhoods and the process of social learning. They show that, in a connected society, local learning ensures that all agents obtain the same payoffs in the long run. Thus, if actions have different payoffs, then all agents choose the same action, and social conformism obtains. The authors develop conditions on the distribution of prior beliefs, the structure of neighborhoods and the informativeness of actions under which this action is optimal. In particular, they identify a property of neighborhood structures--local independence--which greatly facilitates social learning. Simulations of the model generate spatial and temporal patterns of adoption that are consistent with empirical work.

In many theoretical models, it is assumed that there are costs associated with adjusting prices. (In this paper, the existence, type, and magnitude of such costs are investigated empirically. A discrete-choice dynamic-programming model that nests fixed and variable costs is developed, and econometric estimates of the adjustment-cost function are obtained. The data used to implement the model consist of weekly retail prices and sales of three brands of saltine crackers sold by four chains of grocery stores in a small U.S. town. The study has several distinguishing characteristics. First, the data are highly disaggregate (at the level of brand and store). Second, variables are sampled at weekly intervals. Third, the model nests fixed- and variable-adjustment costs and can therefore determine their relative importance. Finally, the discrete-choice model is both structural and dynamic.

We study noncooperative multilateral bargaining games, based on underlying TU games, in which coalitions can renegotiate their agreements. We distinguish between models in which players continue to bargain after implementing agreements (“reversible actions”) and models in which players who implement agreements must leave the game (“irreversible actions”). We show that renegotiation always results in formation of the grand coalition if actions are reversible, but that the process may otherwise end with smaller coalitions. On the other hand, we show that the grand coalition cannot form in one step if the core of the game is empty, irrespective of the reversibility of actions.