Knowledge that Transforms

This paper shows how to use realized kernels to carry out efficient feasible inference on the ex post variation of underlying equity prices in the presence of simple models of market frictions. The weights can be chosen to achieve the best possible rate of convergence and to have an asymptotic variance which equals that of the maximum likelihood estimator in the parametric version of this problem. Realized kernels can also be selected to (i) be analyzed using endogenously spaced data such as that in data bases on transactions, (ii) allow for market frictions which are endogenous, and (iii) allow for temporally dependent noise. The finite sample performance of our estimators is studied using simulation, while empirical work illustrates their use in practice. Copyright 2008 The Econometric Society.

This paper studies a general model of holdup in a setting encompassing the models of Segal (1999) and Che and Hausch (1999) among others. It is shown that if renegotiation is modeled as an infinite-horizon noncooperative bargaining game, then, with a simple initial contract, an efficient equilibrium will generally exist. The contract is robust in the sense that it does not depend on fine details of the model. The contract gives authority to one party to set the terms of trade and gives the other party a nonexpiring option to trade at these terms. The difference from standard results arises because the initial contract ensures that the renegotiation game has multiple equilibria; the multiplicity of continuation equilibria can be used to enforce efficient investment.

There are typically multiple equilibrium outcomes in the Crawford–Sobel (CS) model of strategic information transmission. This paper identifies a simple condition on equilibrium payoffs, called NITS (no incentive to separate), that selects among CS equilibria. Under a commonly used regularity condition, only the equilibrium with the maximal number of induced actions satisfies NITS. We discuss various justifications for NITS, including perturbed cheap-talk games with nonstrategic players or costly lying. We also apply NITS to other models of cheap talk, illustrating its potential beyond the CS framework.

We propose an approximation method for analyzing Ericson and Pakes (1995)-style dynamic models of imperfect competition. We define a new equilibrium concept that we call oblivious equilibrium, in which each firm is assumed to make decisions based only on its own state and knowledge of the long-run average industry state, but where firms ignore current information about competitors' states. The great advantage of oblivious equilibria is that they are much easier to compute than are Markov perfect equilibria. Moreover, we show that, as the market becomes large, if the equilibrium distribution of firm states obeys a certain "light-tail" condition, then oblivious equilibria closely approximate Markov perfect equilibria. This theorem justifies using oblivious equilibria to analyze Markov perfect industry dynamics in Ericson and Pakes (1995)-style models with many firms. Copyright 2008 The Econometric Society.

We study a Monte Carlo algorithm for computing marginal and stationary densities of stochastic models with the Markov property, establishing global asymptotic normality and OP(n–1/2) convergence. Asymptotic normality is used to derive error bounds in terms of the distribution of the norm deviation.

This paper develops a nonparametric theory of preferences over one's own and others' monetary payoffs. We introduce ?more altruistic than? (MAT), a partial ordering over such preferences, and interpret it with known parametric models. We also introduce and illustrate ?more generous than? (MGT), a partial ordering over opportunity sets. Several recent studies focus on two-player extensive form games of complete information in which the first mover (FM) chooses a more or less generous opportunity set for the second mover (SM). Here reciprocity can be formalized as the assertion that an MGT choice by the FM will elicit MAT preferences in the SM. A further assertion is that the effect on preferences is stronger for acts of commission by FM than for acts of omission. We state and prove propositions on the observable consequences of these assertions. Finally, empirical support for the propositions is found in existing data from investment and dictator games, the carrot and stick game, and the Stackelberg duopoly game and in new data from Stackelberg mini-games.

Suppose that each player in a game is rational, each player thinks the other players are rational, and so on. Also, suppose that rationality is taken to incorporate an admissibility requirement-that is, the avoidance of weakly dominated strategies. Which strategies can be played? We provide an epistemic framework in which to address this question. Specifically, we formulate conditions of rationality and mth-order assumption of rationality (RmAR) and rationality and common assumption of rationality (RCAR). We show that (i) RCAR is characterized by a solution concept we call a self-admissible set; (ii) in a type structure, RmAR is characterized by the set of strategies that survive m + 1 rounds of elimination of inadmissible strategies; (iii) under certain conditions, RCAR is impossible in a complete structure.

Experimental studies have found that a decision maker prefers spreading good and bad outcomes evenly over time. We propose, in an axiomatic framework, a new model of discount factors that captures this preference for spread. The model provides a refinement of the discounted utility model while maintaining dynamic consistency. The derived discount factors incorporate gain/loss asymmetry recursively: the difference between average future utility and current utility defines a gain or a loss, and gains are discounted more than losses. This notion of utility smoothing can induce a preference for spread: if bad outcomes are concentrated on future periods, moving one of the bad outcomes to today would be beneficial because such an operation eliminates a large loss and replaces it with a small gain.

We analyze tender offers where privately informed shareholders are uncertain about the raider's ability to improve firm value. The raider suffers a "lemons problem" in that, for any price offered, only shareholders who are relatively pessimistic about the value of the firm tender their shares. Consequently, the raider finds it too costly to induce shareholders to tender when their information is positive. In the limit as the number of shareholders gets arbitrarily large, when private benefits are relatively low, the tender offer is unsuccessful if the takeover has the potential to create value. The takeover market is therefore inefficient. In contrast, when private benefits of control are high, the tender offer allocates the firm to any value-increasing raider, but may also allow inefficient takeovers to occur. Unlike the case where all information is symmetric, shareholders cannot always extract the entire surplus from the acquisition. Copyright 2008 The Econometric Society.

The conventional heteroskedasticity-robust (HR) variance matrix estimator for cross-sectional regression (with or without a degrees-of-freedom adjustment), applied to the fixed-effects estimator for panel data with serially uncorrelated errors, is inconsistent if the number of time periods T is fixed (and greater than 2) as the number of entities n increases. We provide a bias-adjusted HR estimator that is √nT-consistent under any sequences (n T ) in which n and/or T increase to ∞. This estimator can be extended to handle serial correlation of fixed order.