Knowledge that Transforms

Spot asset trading is studied where the only external source of value is an independent draw from a common information dividend distribution at the end of each of fifteen trading periods. Fourteen of twenty-two experiments exhibit price bubbles. This tendency to bubble decreases with trader experience. The regression of changes in mean price on lagged excess bids (bids minus offers in the previous period) supports the hypothesis that the intercept is minus the one-period expected dividend value, and the slope is positive, where excess bids measures excess demand attributable to homegrown capital gains expectations. Copyright 1988 by The Econometric Society.

On cherche a exposer aux utilisateurs des techniques d'estimation par le maximum de vraisemblance a information complete. Pourquoi le choix de l'estimateur de la matrice de covariance des coefficients n'est pas aussi neutre qu'on peut l'esperer

This paper studies the effects of spurious detrending in regression. The asymptotic behavior of traditional least squares estimators and tests is examined in the context of models where the generating mechanism is systematically misspecified by the presence of deterministic time trends. Most previous work on the subject has relied upon Monte Carlo studies to understand the issues involved in detrending data that are generated by integrated processes and our analytical results help to shed light on many of the simulation findings. Standard F tests and Hausman tests are shown to inadequately discriminate between the competing hypotheses. Durbin-Watson statistics, on the other hand, are shown to be valuable measures of series stationarity. The asymptotic properties of regressions and excess volatility tests with detrended integrated time series are also explored.

This paper explores implications for one-stage and two-stage decision processes of a theory of choice tha t accommodates nontransitive preferences. It focuses on probabilistic convexification of finite base sets and on choice from convex sets. The one-stage formulation always has a maximally-preferred element in the convex set. Two-stage processes allow not only a holistic procedure for the entire problem, but also give rise to naive and sophisticated sequential procedures. All three have unambiguous solutions, but they can be radically different under intransitivities. The thre e two-stage solutions coincide when preferences are transitive. Copyright 1988 by The Econometric Society.

We test whether a model of reputation formation in an incomplete information game, using sequential equilibrium, predicts behavior of players in an experiment. Subjects play an abstracted lending game: a B player lends or does not lend; then if B lends, an E player can pay back or renege. The game is played 8 times, and there is a small controlled probability that the E player's induced preferences make him prefer to pay back (but usually he prefers to renege). In sequential equilibrium, even E players who prefer to renege should pay back in early periods of the game, and renege with increasing frequency in later periods, to establish reputations for preferring to pay back. After many repetitions of the 8-period game, actual play is roughly like the sequential equilibrium, except that E players pay back later in the game and more often than they should. This behavior is rational if B players have a "homemade" prior probability of .17 (in addition to the controlled probability) that E players will prefer to pay back. We conclude that sequential equilibrium with homemade incomplete information describes actual behavior well enough that it is plausible to apply it to theoretical settings where individuals make choices (e.g., product markets, labor markets, bargaining).

Household economies of scale (arising from the existence of househo ld public goods, increasing returns in household production, and/or bulk discounts) are incorporated into a utility-theoretic model of household demands. Individuals are assumed to be identical and symmetrically treated within households. Economies of scale parameters for five goods are estimated using the quadratic expenditu re system and data from the U.S. Consumer Expenditure Survey on expenditures by all-adult households. Results suggest the existence o f significant economies of scale in the consumption of all of the included goods, with economies being especially pronounced in the consumption of shelter. Copyright 1988 by The Econometric Society.

The well-known CUSUM test for structural change is investigated whe n there are lagged dependent variables among the regressors in a linear model. The authors show that both a modified CUSUM test, suggested b y J. M. Dufour (1982), and the straightforward CUSUM test retain their asymptotic significance levels in dynamic models, and find that the power depends crucially on the angle between the mean regressor and the structural shift. Copyright 1988 by The Econometric Society.

In a somewhat general context, the author calculate s the order in probability of the difference between consistent roots of rival estimating equations, with application to point estimates i n parametric and nonparametric models, interval estimates, and test s tatistics. Differences in the statistical performances of various com monly-used iterative procedures are detected. He discusses implicatio ns of his results for higher-order efficiency comparisons and for mat ching the first-order efficiency of an implicitly defined target stat istic in finitely-many iterative steps. He justifies estimates obtain ed via a search of the objective function. His results are applied to the linear-in-variables simultaneous equations system. Copyright 1988 by The Econometric Society.

This paper presents a systematic framework for studying infinitely-repeated games with discounting, focusing on pure strategy (subgame) perfect equilibria. It introduces a number of concepts whi ch organize the theory in a natural way. These include the idea of an optimal penal code, and the related notions of simple penal codes an d simple strategy profiles. Copyright 1988 by The Econometric Society.