Knowledge that Transforms

Ve consider the problem of designing a contract between a risk-averse agent and a risk-neutral principal when the agent's action is subject to moral hazard and the principal is free to propose a new contract after the agent has chosen his effort level but before the corresponding outcome is revealed.In this setting any optimal contract is equivalent to one that is "renegotiation-proof." A renegotiation-proof contract that induces the agent to choose high effort levels by promising a higher payment following good outcomes must also induce the agent to choose lower effort levels with sufficiently high probability that the contract would not be renegotiated.We show that for a range of utility functions for the agent, including exponential and logarithmic forms, the cost-minimizing renegotiation-proof contract for a given distribution of efforts is the same as the cost-minimizing contract for that distribution under commitment.Thus, the force of the renegotiation-proof constraint is not to change the way that given distributions are implemented, but rather to change which distributions are feasible.However, if the agent has constant relative risk aversion lower than one, the principal may prefer to give the agent an ex-ante rent in order to relax the renegotiation-proofness constraint, so that the optimal contract may differ from, that under commitment not only in the choice of distribution but also in the way that distribution is implemented.Our theory may shed some light on why compensation of managers and contractors is frequently insensitive to the information obtained after the relationship is terminated, and why executives have considerable discretion to adjust the riskiness of their compensation.1.

"This paper estimates semiparametric reduced-form neoclassical models of life-cycle fertility in Sweden.... The estimated model integrates aspects of life cycle fertility that have previously been studied in isolation of each other: completed fertility, childlessness, interbirth intervals, and the time series of annual birth rates. The main objective of this paper is to determine which aspects of life cycle fertility, if any, are sensitive to male income and female wages."

This paper develops an asymptotic theory for residual based tests for cointegration. Attention is given to the augmented Dickey-Fuller (ADF) test and the Z(subscript alpha) and Z(subscript t) unit root tests. Two new tests are also introduced. The tests are shown to be asymptotically similar, and simple representations of their limiting distributions are given and asymptotic critical values are tabulated. The ADF and Z(subscript t) tests are asymptotically equivalent. Power properties of the test are also studied. The tests are consistent if suitably constructed, but the ADF and Z(subscript t) tests have slower rates of divergence under cointegration than the other tests. Copyright 1990 by The Econometric Society.

In this study, the authors report the results from laboratory asset markets designed to test the rational expectations hypothesis that markets aggregate and transmit the information of differentially informed traders. After documenting evidence in favor of the rational expectations model, they examine which features of their environment are necessary or sufficient to achieve an rational expectations equilibrium. The authors find that trading experience and common knowledge of dividends are jointly sufficient to achieve a rational expectations equilibrium, but that neither is a sufficient condition by itself. They also present some stylized facts about the convergence process leading to a rational expectations equilibrium. Copyright 1990 by The Econometric Society.

The authors analyze a continuous time model with a Walrasian labor market and a random search retail market with prices set on a take-it or leave-it basis. The equilibrium distribution of money holdings is the asymptotic steady state of this stochastic process. There is a unique uniform price steady state equilibrium. The faster the search process the higher the absolute price, wage, and real wage. The instantaneous effect of an equal per capita infusion of money is to raise the price, wage, real wage, and transactions rate. The immediate post-infusion price and wage can overshoot their new asymptotic values. Copyright 1990 by The Econometric Society.

An adaptive learning rule is exhibited for the Azariadis (1981) overlapping generations model of a monetary economy with multiple equilibria, under which the economy may converge to a stationary equilibrium, even if agents do not initially believe that outcomes are significantly different in different sunspot states. The learning rule studied is of the stochastic approximation form studied by H. Robbins and S. Monro (1951); methods for analyzing the convergence of this form of algorithm are presented that may be of use in many other contexts as well. Conditions are given under which convergence to a equilibrium occurs with probability one. Copyright 1990 by The Econometric Society. (This abstract was borrowed from another version of this item.)

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This paper investigates pure strategy sequential equilibria of repeated games with imperfect monitoring. The approach emphasizes the equilibrium value set and the static optimization problems embedded in extremal equilibria. A succession of propositions, central among which is "self-generation, " allow properties of constrained efficient supergame equilibria to be deduced from the solutions of the static problems. The authors show that the latter include solutions having a "bang-bang" property; this affords a significant simplification of the equilibria that need be considered. These results apply to a broad class of asymmetric games, thereby generalizing their earlier work on optimal cartel equilibria. Copyright 1990 by The Econometric Society.

This paper develops asymptotic prediction functions that approximate the shape of the density of future observations and correct for parameter uncertainty. The functions are based on extensions to a definition of predictive likelihood originally suggested by Lauritzen and Hinkley. The prediction function is shown to possess efficiency properties based on the Kullback-Leibler measure of information loss. Examples of the application of the prediction function and the derivation of relative efficiency are shown for linearnormal models, nonnormal models, and ARCH models.

This paper explores the robustness of the essential economic conclusions of the Roy model of self-selection and income inequality to relaxation of its normality assumptions. A log concave version of the model reproduces most of the main results. Log convex cases offer counterexamples. The authors show that in a Roy economy, random assignment is inegalitarian and Pareto inefficient. They consider nonparametric identifiability of latent skill distributions with cross-section and panel data. The authors' analysis proves nonparametric identifiability for the closely related competing risks model. Copyright 1990 by The Econometric Society.