Suppose that the authors are interested in the distribution of a set of characteristics over a population. They study a precise sense in which this distribution can be said to be polarized and provide a theory of measurement. Polarization, as conceptualized here, is closely related to the generation of social tensions, to the possibilities of revolution and revolt, and to the existence of social unrest in general. The authors take special care to distinguish their theory from the theory of inequality measurement. They derive measures of polarization that are easily applicable to distributions of characteristics such as income and wealth. Copyright 1994 by The Econometric Society.
Many alternative theories have been proposed to explain violations of expected utility (EU) theory observed in experiments. Several recent studies test some of these alternative theories against each other. Formal tests used to judge the theories usually count the number of responses consistent with the theory, ignoring systematic variation in responses that are inconsistent. We develop a maximum-likelihood estimation method which uses all the information in the data, creates test statistics that can be aggregated across studies, and enables one to judge the predictive utility-the fit and parsimony-of utility theories. Analyses of 23 data sets, using several thousand choices, suggest a menu of theories which sacrifice the least parsimony for the biggest improvement in fit. The menu is: mixed fanning, prospect theory, EU, and expected value. Which theories are best is highly sensitive to whether gambles in a pair have the same support (EU fits better) or not (EU fits poorly). Our method may have application to other domains in which various theories predict different subsets of choices (e.g., refinements of Nash equilibrium in noncooperative games).
This paper derives asymptotically optimal tests for testing problems in which a nuisance parameter exists under the alternative hypothesis but not under the null. For example, the results apply to tests of structural change with unknown changepoint. The testing problem considered is nonstandard and the classical asymptotic optimality results for the Lagrange multiplier, Wald, and likelihood ratio do not apply. A weighted average power criterion is used here to generate optimal tests. This criterion is similar to that used by A. Wald (1943) to obtain the classical asymptotic optimality properties of Wald tests in 'regular' testing problems. Copyright 1994 by The Econometric Society.
A number of generalizations of the expected utility preference functional are estimated using experimentally generated data involving 100 pairwise choice questions repeated on two separate occasions. Likelihood ratio tests are conducted to investigate the statistical superiority of the various generalizations and the Akaike information criterion is used to distinguish between them. The economic superiority of the various generalizations is also explored and the paper concludes that, for many subjects, the superiority of several of the generalizations is not established. Copyright 1994 by The Econometric Society.
[Many researchers have employed ARCH models to estimate conditional variances and covariances. How successfully can ARCH models carry out this estimation when they are misspecified? This paper employs continuous record asymptotics to approximate the distribution of the measurement error. This allows us to (a) compare the efficiency of various ARCH models, (b) characterize the impact of different kinds of misspecification (e.g., "fat-tailed" errors, misspecified conditional means) on efficiency, and (c) characterize asymptotically optimal ARCH conditional variance estimates. We apply our results to derive optimal ARCH filters for three diffusion models, and to examine in detail the filtering properties of GARCH(1, 1), AR(1) EGARCH, and the model of Taylor (1986) and Schwert (1989).]
The authors derive a necessary and sufficient condition for the solution set of an optimization problem to be monotonic in the parameters of the problem. In addition, they develop practical methods for checking the condition and demonstrate its applications to the classical theories of the competitive firm, the monopolist, the Bertrand oligopolist, consumer and growth theory, game theory, and general equilibrium analysis. Copyright 1994 by The Econometric Society.
BEGINNING WITH THE WORK OF A. K. SEN (1976) poverty research has made extensive use of axioms to construct and evaluate distribution-sensitive poverty measures. An index is distribution-sensitive if it satisfies Sen's (1976) weak transfer axiom; poverty decreases when income is transferred from a high income poor person to a low income poor person. A distribution-sensitive measure is appealing because it reflects the extent of deprivation among the poor and incorporates aspects of poverty that are ignored by standard measures such as the headcount ratio and poverty gap ratio. In addition to the weak transfer axiom, a number of other axioms that have considerable intuitive appeal when considered in isolation have been identified. However, several researchers (e.g., Thon (1979), Kundu and Smith (1983), and Donaldson and Weymark (1986)) have shown that in some cases it is impossible to devise a poverty index that is consistent with the joint implications of otherwise reasonable axioms. Foster (1984, p. 233) interprets the difficulties caused by the combined effects of two or more axioms . . as a warning not to measure too many aspects of poverty at the same time. As a consequence, it is now generally recognized that poverty axioms can have joint effects and it is important to explore the implications of such influences. In a comprehensive investigation of subgroup consistent poverty measures, Foster and Shorrocks (1991) examine the interaction between the scale invariance and translation invariance axioms.2 The first axiom requires a poverty index to be unaffected by the doubling of all incomes and the poverty line. The second axiom requires a poverty index to be unaffected by equal increments to each income and to the poverty line.3 Poverty indices that satisfy the first axiom are considered to be poverty while those satisfying the second are poverty indices. If a distribution-sensitive index satisfying both axioms could be found it would provide a single measure of relative and absolute poverty and have considerable intuitive appeal in poverty measurement. But, one implication of Foster and Shorrocks' (1991) work (Proposition 6) is that for the class of poverty measures they consider, a distribution-sensitive poverty index that is both relative and absolute cannot exist. This note follows Foster and Shorrocks (1991) but concentrates on the implications of the joint effects of scale and translation invariance. We drop the assumption of subgroup consistency and derive a proposition that has several important implications. First, for all poverty indices, only those relying upon simple headcounts of the poor satisfy both the scale and translation invariance axioms. This result clearly illustrates the strong restrictions imposed by combining scale and translation invariance with other standard axioms; there can be no distribution-sensitive poverty index that is relative and absolute. Second, the result provides a simple characterization of the entire class of the headcount-related poverty indices (defined below). Third, the result leads to a direct proof of the result
Strategic implications of the learning curve hypothesis are analyzed in the context of a price-setting, differentiated duopoly selling to a sequence of heterogeneous buyers with uncertain demands. A unique Markov perfect equilibrium is characterized and sufficient conditions are provided for market dominance to be self-reinforcing. Increasing market dominance implies that learning is privately disadvantageous. Finally, introducing avoidable fixed costs and possible exit into the model yields a new theory of predatory pricing based on the learning curve hypothesis. Copyright 1994 by The Econometric Society.
The objective of the Institute for Policy Reform is to enhance the foundation for broad based economic growth in developing countries.Through its research, education and training activities the Institute encourages active participation in the dialogue on policy reform, focusing on changes that stimulate and sustain economic development.At the core of these activities is the search for creative ideas that can be used to design constitutional, institutional and policy reforms.Research fellows and policy practitioners are engaged by IPR to expand the analytical core of the reform process.This includes all elements of comprehensive and customized reforms packages, recognizing cultural, political, economic and environmental elements as crucial dimensions of societies.
The Generalized Extreme Value Model was developed by McFadden for the case with discrete choice sets. The present paper extends this model to cases with both discrete and continuous choice sets and choice sets that are unobservable relative to the analyst. We also propose behavioral assumptions that justify random utility functions (processes) that have a max stable structure i.e., utility processes where the finite dimensional distributions are of the multivariate extreme value type. Finally we derive non-parametrically testable implications for the choice probabilities in the continuous case.