Knowledge that Transforms

Why do both left and right political parties typically propose progressive income taxation schemes in political competition? Analysis of this problem has been hindered by the two-dimensionality of the issue space. To give parties a choice over a domain that contains both progressive and regressive income tax policies requires an issue space that is at least two-dimensional. Nash equilibrium in pure strategies of the standard two-party game, whose players have complete preferences over a two-dimensional policy space, generically fails to exist. I introduce a new equilibrium concept for political games, based on the fact of factional conflict within parties. Each party is supposed to consist of reformists, militants, and opportunists: each faction has a complete preference order on policy space, but together they can only agree on a partial order. Nash equilibria of the two-party game, where the policy space consists of all quadratic income tax functions, and each party is represented by its partial order, exist, and it is shown that, in such equilibria, both parties propose progressive income taxation.

This paper presents a simple two-step nonparametric estimator for a triangular simultaneous equation model. Our approach employs series approximations that exploit the additive structure of the model. The first step comprises the nonparametric estimation of the reduced form and the corresponding residuals. The second step is the estimation of the primary equation via nonparametric regression with the reduced form residuals included as a regressor. We derive consistency and asymptotic normality results for our estimator, including optimal convergence rates. Finally we present an empirical example, based on the relationship between the hourly wage rate and annual hours worked, which illustrates the utility of our approach.

The proportional hazard model with unobserved heterogeneity gives the hazard function of a random variable conditional on covariates and a second random variable representing unobserved heterogeneity. This paper shows how to estimate the baseline hazard function and the distribution of the unobserved heterogeneity nonparametrically. The baseline hazard function and heterogeneity distribution are assumed to satisfy smoothness conditions but are not assumed to belong to known, finite-dimensional, parametric families. Existing estimators assume that the baseline hazard function or heterogeneity distribution belongs to a known parametric family. Thus, the estimators presented here are more general than existing ones.

Continuing rapid growth in U.S. gasoline consumption threatens to exacerbate environmental and congestion problems. We use flexible semiparametric and nonparametric methods to guide analysis of household gasoline consumption, and including this variable cuts the estimated income elasticity in half. Slower projected future growth in licensed drivers points to slower growth in gasoline consumption. A parsimonious representation of age, income, lifecycle and location effects is developed and tested. We show how flexible methods also helped reveal fundamental problems with the available price data.

In this paper we derive a model of aggregate investment that builds from the lumpy microeconomic behavior of firms facing stochastic fixed adjustment costs. Instead of the standard sharp (S,s) bands, firms' adjustment policies take the form of a probability of adjustment (adjustment hazard) that responds smoothly to changes in firms' capacity gap. The model has appealing aggregation properties, and yields nonlinear aggregate time series processes. The passivity of normal times is, occasionally, more than offset by the brisk response to large accumulated shocks. Using within and out-of-sample criteria, we find that the model performs substantially better than the standard linear models of investment for postwar sectoral U.S. manufacturing equipment and structures investment data.

We consider strategyproof social choice functions defined over product domains. If preferences are strict orderings and separable, then strategyproof social choice functions must be decomposable provided that the domain of preferences is rich. We provide several characterization results in the case where preferences are separable only with respect to the elements of some partition of the set of components and these partitions vary across individuals. We characterize the libertarian social choice function and show that no superset of the tops separable domain admits strategyproof nondictatorial social choice functions.

We consider the problem of the design and sale of a security backed by specified assets. Given access to higher-return investments, the issuer has an incentive to raise capital by securitizing part of these assets. At the time the security is issued, the issuer's or underwriter's private information regarding the payoff of the security may cause illiquidity, in the form of a downward-sloping demand curve for the security. The severity of this illiquidity depends upon the sensitivity of the value of the issued security to the issuer's private information. Thus, the security-design problem involves a tradeoff between the retention cost of holding cash flows not included in the security design, and the liquidity cost of including the cash flows and making the security design more sensitive to the issuer's private information. We characterize the optimal security design in several cases. We also demonstrate circumstances under which standard debt is optimal and show that the riskiness of the debt is increasing in the issuer's retention costs for assets.

We study economies with one private good and one pure public good, and consider the following axioms of social choice functions. Strategy-proofness says that no agent can benefit by misrepresenting his preferences, regardless of whether the other agents misrepresent or not, and whatever his preferences are. Symmetry says that if two agents have the same preference, they must be treated equally. Anonymity says that when the preferences of two agents are switched, their consumption bundles are also switched. Individual rationality says that a social choice function never assigns an allocation which makes some agent worse off than he would be by consuming no public good and paying nothing. In Theorem 1, we characterize the class of strategy-proof, budget-balancing, and symmetric social choice functions, assuming convexity of the cost function of the public good. In Theorem 2, we characterize the class of strategy-proof, budget-balancing, and anonymous social choice functions. In Theorem 3, we characterize the class of strategy-proof, budget-balancing, symmetric, and individually rational social choice functions.

It is shown that the linkage principle (Milgrom and Weber (1982)) does not extend to the multi-unit auction setting. An analysis of the equilibium bidding strategies is carried out for the general two-agent/two-unit Vickrey auction in order to provide economic insight into the nature of the failure.