Knowledge that Transforms

Our subject is estimation and inference concerning long-run economic equilibria in models with stochastic trends. An asymptotic theory is provided to analyze a menu of currently existing estimators of cointegrated systems. We study in detail the single-equation ECM (SEECM) approach of Hendry. Our theoretical results lead to prescriptions for empirical work, such as specifying SEECM's nonlinearly and including lagged equilibrium relationships rather than lagged differences of the dependent variable as covariates. Simulations support these prescriptions, and point to problems of overfitting not encountered in the semiparametric approach of Phillips and Hansen (1990).

We develop a model of repeated product improvements in a continuum of sectors. Each product follows a stochastic progression up a quality ladder.

This paper suggests tests for the heterogeneity of parameters in linear least-squares estimation. The tests are based on the properties of resampled estimates, and test the hypotheses that the parameters have a common mean, or that they are independently and identically distributed. The tests can be viewed as the analogue of those based on recursive residuals, in cross-sectional models. We analyse the properties of tests based on jack-knifed estimates in the linear regression model, and compare their performance in a small empirical application.

A competitive, dynamic model of entry into a new industry is set up and both its positive and normative aspects are studied. The main assumptions are that entry is sequential, that it occurs under imperfect information on the size of the market and that better information becomes available as time goes on. The gradual improvement in information is due to the fact that later waves of entrants are able to observe the profitability of earlier entrants. The major results reported here (under suitable restrictions) are that the equilibrium rate of entry is monotonically decreasing over time, and that—at any given point in time—it is smaller than the socially optimal one.

An organization's promotion decision between two workers is modeled as a problem of boundedly rational learning about ability. The decisionmaker can bias noisy rank-order contests sequentially, thereby changing the information they convey. The optimal final-period bias favors the "leader," reinforcing his likely ability advantage. When optimally biased rank-order information is a sufficient statistic for cardinal information, the leader is favored in every period. In other environments, bias in early periods may (1) favor the early loser, (2) be optimal even when the workers are equally rated, and (3) reduce the favored worker's promotion chances.

We prove the general existence of steady states with positive consumption in an N goods and fiat money version of the Kiyotaki-Wright model by admitting mixed strategies. We also show that there always exists a steady state in which everyone accepts a least costly-to-store object. In particular, if fiat money is one such object, then there always exists a monetary steady state. We also establish some other properties of steady states and comment on the relationship between steady states and (incentive) feasible allocations.

The supergame-theoretic model of price competition (Rotemberg and Saloner, 1986) is reexamined in the case of serially correlate demand shocks. The equilibrium price is shown to exhibit the same counter-cyclical movement as the i.i.d. case if the discount factor and the number of firms satisfy a certain relationship.

The effect that the entry of additional firms has on consumer welfare and efficiency in a simple equilibrium-search model is considered. Special attention is given to the case where an arbitrageur enters. It is shown that entry can increase the monopoly power of firms and so reduce welfare. In particular, arbitrage always makes consumers worse off and can increase price dispersion and reduce efficiency in the market. The source of the results is that, unlike other forms of product differentiation, the amount of monopoly power that firms have in a search model is determined endogenously by consumers.

This paper provides sufficient conditions for the identification of both static and dynamic models containing endogenous regressors from panel data by utilizing the restrictions across time periods on the parameters. It is shown that identification is achieved under quite weak conditions even in the presence of a general pattern of correlation between the errors and the time-varying variables. Efficient estimation procedures for the models considered and some specification tests are outlined. Finally, static formulations relating individuals' intakes of nutrients in the previous twenty-four hours to household income are estimated using (ICRISAT) panel data from rural India.

This paper concerns a decision problem of an agent, searching to find a low price, whose memory is represented by a partition of the set of possible past prices. The number of elements in the partition is limited. I characterize the optimal partition for the case of a single decision, and then consider memory allocation among several decisions. I consider a case in which a consumer who must allocate a single bit of memory among two decision problems would do better to allocate it exclusively to one of the problems than to use it to convey joint information about both.