Knowledge that Transforms

"Monte Carlo experimentation in econometrics helps ‘solve’ deterministic problems by simulating stochastic analogues in which the analytical unknowns are reformulated as parameters to be estimated." (Hendry (1980)) With that in mind, Monte Carlo studies may be divided operationally into three phases: design, simulation, and post-simulation analysis. This paper provides a guide to the last of those three, post-simulation analysis, given the design and simulation of a Monte Carlo study, and uses Pesaran's (1974) study of statistics for testing non-nested hypotheses to illustrate the techniques described. A statistic is derived for testing for significant deviations between the asymptotic and (observed) finite sample properties. Further, that statistic provides the basis for analysing discrepancies between the finite sample and asymptotic properties using response surfaces. The results for Pesaran's study indicate the value of asymptotic theory in interpreting finite sample properties and certain limitations for doing so. Finally, a method is proposed for adjusting the finite sample sizes of different test statistics so that comparisons of their power may be made. Extensions to other finite sample properties are indicated.

In a principal-agent model with adverse selection, we study the implementation of social choice functions when the agent's message space is a correspondence which depends on this true characteristic. We characterize such correspondence for which the Revelation Principle is valid.

We consider a Heckscher-Ohlin-Samuelson trade model with two lobbies, representing the interests of factor owners, and two political parties. The lobbies contribute resources to politics, equating their returns to political and economic activity at the margin, while the parties maximize their probability of election, trading off general voter dissatisfaction with protection against the electioneering resources that favorable policies attract from the lobbies. The equilibrium level of protection of a factor and its expected rate of return increase with its relative endowment. If this relative endowment is high (low) then the factor will be better (worse) off than under free trade but at intermediate factor endowment ratios, both factors will be worse off. Under parameter changes making lobbies more sensitive to the commodity price, the lobbies contribute more resources to politics and can both be worse off even though the parties are proposing lower trade distortions.

This paper develops the instrumental variables estimator for a possibly incomplete, dynamic economic system with vector autoregressive moving average disturbances. Its asymptotic distribution is derived and, under fairly weak conditions, it is shown that lagged endogenous variables may be validly included in the set of instruments. Statistics are proposed for testing the order of the error process and the validity of the instruments.

A monetary general equilibrium asset-pricing model with sticky goods prices is developed. Goods prices are set by monopolistically competitive firms that maximize stock market value. Equilibria with underutilization of resources, excess capacity, in some states result, in contrast to previous monetary asset-pricing models. The degree of competition affects capacity utilization. Monetary policy can affect output and resource utilization, in addition to real asset prices, depending upon the amount of information available to the monetary authority.

This paper analyses monopolistically competitive markets under incomplete information, facing unanticipated disturbances. Firms determine their prices before they have information about other firms' prices, and form their expectations about the average price rationally. If the market becomes very competitive in the sense that the price elasticity of individual demand is close to infinity, then the average price is completely insensitive to short-run unanticipated disturbances. In the intermediate case, if (a) cost disturbances are uniform and (b) demand and cost disturbances are correlated, then the average price is sensitive to cost and insensitive to demand.

This paper brings some empirical evidence to the construction of a more disaggregated view of disequilibrium. Individual data on firms collected by INSEE through periodic Business Surveys are used to construct the distribution of firms over the four possible disequilibrium regimes. Then the behavior of this distribution over time is analyzed by estimating dynamic conditional logit models on panel data.

We introduce into the standard spatial competition model the consumption of land by households, and study the spatial competition under the influence of a land market. In contrast to the standard assumption of a fixed, given distribution of households, we introduce the possibility of households' relocation in reaction to firms' location decisions. Thus, the spatial distribution of households is treated as endogenous, and a land market is introduced on which households compete for land-use. Households consume simultaneously land and firms' output. Accordingly, the demand of each household becomes in turn endogenous as it depends on the income left after the land rent is paid. Not surprisingly, the results obtained within this more general framework prove to be very different from the standard results. For example, in the 2- and 3-firm cases, the optimal configuration of firms is a Nash equilibrium when transport costs are high enough or the amount of vacant land is large enough. The existence property is restored in the 3-firm case when the transport costs are high enough. The introduction of vacant land causes a discontinuous change in the set of equilibrium configurations.

Under the laws of most countries, a distinction is made between gains and losses by businesses. Losses that must be “carried forward” are subjept to two penalties: a loss of interest, and expiration. Previous examinations have focused on the higher expected tax payments such a tax system without “full loss offset” imposes on risky projects. This paper presents a dynamic analysis of the impact of taxation on investment when gains and losses are treated asymmetrically. The results demonstrate how firm characteristics and the timing of taxes can influence behaviour.

This paper develops a general asymptotic theory of regression for processes which are integrated of order one. The theory includes vector autoregressions and multivariate regressions amongst integrated processes that are driven by innovation sequences which allow for a wide class of weak dependence and heterogeneity. The models studied cover cointegrated systems such as those advanced recently by Granger and Engle and quite general linear simultaneous equations systems with contemporaneous regressor error correlation and serially correlated errors. Problems of statistical testing in vector autoregressions and multivariate regressions with integrated processes are also studied. It is shown that the asympotic theory for conventional tests involves major departures from classical theory and raises new and important issues of the presence of nuisance parameters in the limiting distribution theory.