Knowledge that Transforms

Unexpected earnings, Intraindustry information transfers, Disclosures, Market reaction

Auditing, Audit fees, Auditor Low balling, Auditor change

Auditing, Financial statement errors, Auditor experience, Decision making

In this paper, the authors study a general concave discrete-time, infinite-horizon, optimal-control problem. They establish necessary and sufficient conditions for optimality in the weak sense of W. A. Brock and for optimality in the strong sense of D. Gale. The corresponding transversality conditions are general exhaustion properties of the limit value of the optimal state variables; these properties cover and extend the well-known results obtained in special cases.

This paper proposes a characterization of optimal strategies for playing certain repeated coordination games whose players have identical preferences. Players' optimal coordination strategies reflect their uncertainty about how their partners will respond to multiple-equilibrium problems; this uncertainty constrains the statistical relationships between their strategy choices players can bring about. The authors show that optimality is nevertheless consistent with subgame-perfect equilibrium. Examples are analyzed in which players use precedents as focal points to achieve and maintain coordination, and in which they play dominated strategies with positive probability in early stages in the hope of generating a useful precedent.

In this paper, the feasibility of estimating a Nash labor market equilibrium model using only information on workers is demonstrated. The equilibrium model, adapted from Albrecht and Axell (1984), is based on workers who are homogenous in terms of market productivity and heterogeneous in terms of nonmarket productivity, and on firms that are heterogeneous in terms of productive efficiency. The equilibrium model is contrasted with an unrestricted version of the model in terms of its fit to the data.

This paper considers asymptotically efficient instrumental variables estimation of nonlinear models in an i.i.d. environment. The class of models includes nonlinear simultaneous equations models and other models of interest. A problem in constructing efficient instrumental variables estimators for such models is that the optimal instruments involve a conditional expectation, calculation of which can require functional form assumptions for the conditional distribution of endogenous variables, as well as integration. Nonparametric methods provide a way of avoiding this difficulty. Here it is shown that nonparametric estimates of the optimal instruments can give asymptotically efficient instrumental variables estimators. Also, ways of choosing the nonparametric estimate in applications are discussed. Two types of nonparametric estimates of the optimal instruments are considered. Each involves nonparametric regression, one by nearest neighbor and the other by series approximation. The finite sample properties of the estimators are considered in a small sampling experiment involving an endogenous dummy variable model.

This paper describes a new approach to normative economics, combining the theory of social choice with econometric modeling of aggregate consumer behavior. The author first derives a system of aggregate demand functions by exact aggregation over individual demand functions. He then constructs measures of individual welfare from systems of individual demand functions. Finally, the author incorporates these measures into a social welfare function, introducing ethical assumptions based on horizontal and vertical equity. To illustrate the application of this approach, he considers the U.S. standard of living and its cost over the period 1947-85.

In this paper, the authors reexamine the data from B. O'Neill's (1987) experiment involving a repeated, two-person, constant-sum game. They find that there is less evidence in support of the minimax hypothesis than indicated by O'Neill. There is strong evidence of serial correlation in players' choices, with several players displaying statistically significant dependence on the past moves of their opponents. The authors interpret this finding as evidence that the plays themselves rejected minimax play as the appropriate model for their opponents' behavior. They find no evidence that players' behavior approached minimax behavior as players became more experienced.

This paper analyzes a competitive credit market where banks use imperfect and independent tests to assess the ability of a potential creditor to repay credit. The banks compete by announcing interest rates at which they will provide credit to those applicants who pass the banks' tests. The proportion of applicants who pass the test of at least one bank increases with the number of banks providing credit, so the average credit-worthiness decreases. It is then shown that in a situation where all banks charge the same interest rate, a bank always has the incentive to undercut in order to improve the average credit-worthiness of its own clientele. This feature represents the major difference from the situations in standard Bertrand and Bertrand-Edgeworth models.