The paper studies how asset prices are determined in a decentralized market with asymmetric information about asset values. We consider an economy in which a large number of agents trade two assets in bilateral meetings. A fraction of the agents has private information about the asset values. We show that, over time, uninformed agents can elicit information from their trading partners by making small offers. This form of experimentation allows the uninformed agents to acquire information as long as there are potential gains from trade in the economy. As a consequence, the economy converges to a Pareto efficient allocation.
We show in an environment of incomplete information that monotonicity and the Pareto property applied only when there is common knowledge of Pareto dominance imply (i) there must exist a common prior over the smallest common knowledge event, and (ii) aggregation must be ex ante and ex post utilitarian with respect to that common prior and individual von Neumann–Morgenstern utility indices.
This paper uses the information contained in the joint dynamics of individuals' labor earnings and consumption-choice decisions to quantify both the amount of income risk that individuals face and the extent to which they have access to informal insurance against this risk. We accomplish this task by using indirect inference to estimate a structural consumption–savings model, in which individuals both learn about the nature of their income process and partly insure shocks via informal mechanisms. In this framework, we estimate (i) the degree of partial insurance, (ii) the extent of systematic differences in income growth rates, (iii) the precision with which individuals know their own income growth rates when they begin their working lives, (iv) the persistence of typical labor income shocks, (v) the tightness of borrowing constraints, and (vi) the amount of measurement error in the data. In implementing indirect inference, we find that an auxiliary model that approximates the true structural equations of the model (which are not estimable) works very well, with negligible small sample bias. The main substantive findings are that income shocks are moderately persistent, systematic differences in income growth rates are large, individuals have substantial amounts of information about their income growth rates, and about one-half of income shocks are smoothed via partial insurance. Putting these findings together, the amount of uninsurable lifetime income risk that individuals perceive is substantially smaller than what is typically assumed in calibrated macroeconomic models with incomplete markets.
This paper introduces a general method to convert a model defined by moment conditions involving both observed and unobserved variables into equivalent moment conditions involving only observable variables. This task can be accomplished without introducing infinite-dimensional nuisance parameters using a least-favourable entropy-maximising distribution. We demonstrate, through examples and simulations, that this approach covers a wide class of latent variables models, including some game-theoretic models and models with limited dependent variables, interval-valued data, errors-in-variables, or combinations thereof. Both point- and set-identified models are transparently covered. In the latter case, the method also complements the recent literature on generic set-inference methods by providing the moment conditions needed to construct a GMM-type objective function for a wide class of models. Extensions of the method that cover conditional moments, independence restrictions and some state-space models are also given.
In this paper, we compare how two different types of political regimes—direct versus representative democracy—redistribute income toward the relatively poor segments of society after the introduction of universal and equal suffrage. Swedish local governments are used as a testing ground since this setting offers a number of attractive features for a credible impact evaluation. Most importantly, we exploit the existence of a population threshold, which partly determined a local government's choice of democracy to implement a regression-discontinuity design. The results indicate that direct democracies spend 40–60 percent less on public welfare. Our interpretation is that direct democracy may be more prone to elite capture than representative democracy since the elite's potential to exercise de facto power is likely to be greater in direct democracy after democratization.
We axiomatize preferences that can be represented by a monotonic aggregation of subjective expected utilities generated by a utility function and some set of i.i.d. probability measures over a product state space, S∞. For such preferences, we define relevant measures, show that they are treated as if they were the only marginals possibly governing the state space, and connect them with the measures appearing in the aforementioned representation. These results allow us to interpret relevant measures as reflecting part of perceived ambiguity, meaning subjective uncertainty about probabilities over states. Under mild conditions, we show that increases or decreases in ambiguity aversion cannot affect the relevant measures. This property, necessary for the conclusion that these measures reflect only perceived ambiguity, distinguishes the set of relevant measures from the leading alternative in the literature. We apply our findings to a number of well-known models of ambiguity-sensitive preferences. For each model, we identify the set of relevant measures and the implications of comparative ambiguity aversion.
This paper considers the problem of testing a finite number of moment inequalities. We propose a two-step approach. In the first step, a confidence region for the moments is constructed. In the second step, this set is used to provide information about which moments are “negative.” A Bonferonni-type correction is used to account for the fact that with some probability the moments may not lie in the confidence region. It is shown that the test controls size uniformly over a large class of distributions for the observed data. An important feature of the proposal is that it remains computationally feasible, even when the number of moments is large. The finite-sample properties of the procedure are examined via a simulation study, which demonstrates, among other things, that the proposal remains competitive with existing procedures while being computationally more attractive.
We test the portability of level-0 assumptions in level-k theory in an experimental investigation of behavior in Coordination, Discoordination, and Hide and Seek games with common, non-neutral frames. Assuming that level-0 behavior depends only on the frame, we derive hypotheses that are independent of prior assumptions about salience. Those hypotheses are not confirmed. Our findings contrast with previous research which has fitted parameterized level-k models to Hide and Seek data. We show that, as a criterion of successful explanation, the existence of a plausible model that replicates the main patterns in these data has a high probability of false positives.
This paper considers nonparametric identification of a two-stage entry and bidding game we call the Affiliated-Signal (AS) model. This model assumes that potential bidders have private values, observe signals of their values prior to entry, and then choose whether to undertake a costly entry process, but imposes only minimal structure on the relationship between signals and values. It thereby nests a wide range of entry processes, including in particular the Samuelson (1985) and Levin and Smith (1994) models as special cases. Working within the AS model, we map variation in factors affecting entry behavior (potential competition or entry costs) into identified bounds on model fundamentals. These bounds are constructive, collapse to point identification when available entry variation is continuous, and can readily be refined to produce the pointwise sharp identified set. We then extend our core results to accommodate nonseparable unobserved auction-level heterogeneity and potential endogeneity of entry shifters, thereby establishing a formal identification framework for structural analysis of auctions with selective entry.
We define the class of two‐player zero‐sum games with payoffs having mild discontinuities, which in applications typically stem from how ties are resolved. For such games, we establish sufficient conditions for existence of a value of the game, maximin and minimax strategies for the players, and a Nash equilibrium. If all discontinuities favor one player, then a value exists and that player has a maximin strategy. A property called payoff approachability implies existence of an equilibrium, and that the resulting value is invariant: games with the same payoffs at points of continuity have the same value and ɛ‐equilibria. For voting games in which two candidates propose policies and a candidate wins election if a weighted majority of voters prefer his proposed policy, we provide tie‐breaking rules and assumptions about voters' preferences sufficient to imply payoff approachability. These assumptions are satisfied by generic preferences if the dimension of the space of policies exceeds the number of voters; or with no dimensional restriction, if the electorate is sufficiently large. Each Colonel Blotto game is a special case in which each candidate allocates a resource among several constituencies and a candidate gets votes from those allocated more than his opponent offers; in this case, for simple‐majority rule we prove existence of an equilibrium with zero probability of ties.