This paper studies the robustness of an equilibrium to incomplete information in binary‐action supermodular games. Using a generalized version of belief operator, we explore the restrictions that prior beliefs impose on higher order beliefs. In particular, we obtain a nontrivial lower bound on the probability of a common belief event, uniform over type spaces, when the underlying game has a monotone potential. Conversely, when the game has no monotone potential, we construct a type space with an arbitrarily high probability event in which players never have common belief about that event. As an implication of these results, we show for generic binary‐action supermodular games that an action profile is robust to incomplete information if and only if it is a monotone potential maximizer. Our study offers new methodology and insight to the analysis of global game equilibrium selection.
Weak contract enforcement may reduce the efficiency of production in developing countries. I study how contract enforcement affects efficiency in procurement auctions for the largest power projects in India. I gather data on bidding and ex post contract renegotiation and find that the renegotiation of contracts in response to cost shocks is widespread, despite that bidders are allowed to index their bids to future costs like the price of coal. To study heterogeneity in bidding strategies, I construct a new measure of firm connectedness, based on whether a firm has been awarded coal concessions by the Government. Connected firms choose to index less of the value of their bids to coal prices and, through this strategy, expose themselves to cost shocks to induce renegotiation. I use a structural model of bidding in a scoring auction to characterize equilibrium bidding when bidders are heterogeneous both in cost and in the payments they expect after renegotiation. The model estimates show that bidders offer power below cost due to the expected value of later renegotiation. The model is used to simulate bidding and efficiency with strict contract enforcement. Contract enforcement is found to be pro‐competitive. With no renegotiation, equilibrium bids would rise to cover cost, but markups relative to total contract value fall sharply. Production costs decline, due to projects being allocated to lower‐cost bidders over those who expect larger payments in renegotiation.
This paper investigates the determinants of political polarization, a phenomenon of increasing relevance in Western democracies. How much of polarization is driven by divergence in the ideologies of politicians? How much is instead the result of changes in the capacity of parties to control their members? We use detailed internal information on party discipline in the context of the U.S. Congress—whip count data for 1977–1986—to identify and structurally estimate an economic model of legislative activity in which agenda selection, party discipline, and member votes are endogenous. The model delivers estimates of the ideological preferences of politicians, the extent of party control, and allows us to assess the effects of polarization through agenda setting (i.e., which alternatives to a status quo are strategically pursued). We find that parties account for approximately 40% of the political polarization in legislative voting over this time period, a critical inflection point in U.S. polarization. We also show that, absent party control, historically significant economic policies would have not passed or lost substantial support. Counterfactual exercises establish that party control is highly relevant for the probability of success of a given bill and that polarization in ideological preferences is more consequential for policy selection, resulting in different bills being pursued.
The objective of this paper is to identify and estimate network formation models using observed data on network structure. We characterize network formation as a simultaneous‐move game, where the utility from forming a link depends on the structure of the network, thereby generating strategic interactions between links. With the prevalence of multiple equilibria, the parameters are not necessarily point identified. We leave the equilibrium selection unrestricted and propose a partial identification approach. We derive bounds on the probability of observing a subnetwork, where a subnetwork is the restriction of a network to a subset of the individuals. Unlike the standard bounds as in Ciliberto and Tamer (2009), these subnetwork bounds are computationally tractable in large networks provided we consider small subnetworks. We provide Monte Carlo evidence that bounds from small subnetworks are informative in large networks.
Treating civic preferences as endogenous and government policies and tax capacities as both an influence on and a consequence of their evolution is an important new strand of thinking to which Besley has contributed. I ask: Does his model provide a convincing explanation of the way that civic cultures and the expansion of the state evolved as a matter of historical fact? And I suggest a number of alternative modeling approaches that both would recognize that policy makers take account of the effects of their policy choices on preferences and, consistent with empirical observations, would support equilibria with culturally heterogeneous rather than homogeneous populations.
ANDREWS, GENTZKOW, AND SHAPIRO (2020), henceforth AGS, make important progress on a challenging and fundamental question. The authors consider a setting in which a researcher reports an estimate ĉn that is unbiased under the researcher’s model. The researcher also reports a statistic γ̂n and a measure of informativeness of γ̂n for ĉn, denoted by . AGS show can be related to properties of the distribution of ĉn under models larger than the one employed by the researcher. As a result, can play a role in reassuring a reader who is concerned about some aspects of the researcher’s model. I illustrate the properties of with two examples. The first example is based on the classic selection problem of Heckman (1979) and portrays a setting in which a high is not reassuring. The example shows that if a researcher has assumed random assignment and the reader is concerned about it, then the bias of ĉn under the reader’s model can be arbitrarily large regardless of . The second example is based on the discussion of Attanasio, Meghir, and Santiago (2012) in AGS. This example illustrates that if ĉn and γ̂n are estimators of a common parameter, then can be linked to the properties of a Hausman (1978) test. As a result, √ 1 − can be shown to equal the (normalized) largest bias of ĉn under the reader’s model and, in this sense, a high is reassuring. I show this conclusion holds generally in a classical local asymptotic framework (Bickel, Klassen, Ritov, and Wellner (1993)). The two examples underscore that, as emphasized by AGS, whether a high is reassuring to the reader can crucially depend on the particulars of the researcher’s and reader’s models. I employ the notation in AGS with some minor modifications. The researcher’s model is indexed by η ∈ H. The reader entertains a larger model indexed by (η ζ) ∈ H × Z. I focus on the perspective of the reader, who views the parameter of interest as a function of (η ζ) that we denote by c(η ζ). Under the reader’s model, the distribution of the data is determined by the value of (η ζ). To emphasize this dependence, I write E(η ζ)[ĉn] to denote the expectation of ĉn under (η ζ). The property that ĉn is unbiased under the researcher’s model is equivalent to E(η 0)[ĉn] = c(η 0) for any η ∈H, while the bias under (η ζ) in the reader’s model is given by E(η ζ)[ĉn] − c(η ζ). As in AGS, I consider an analysis local to proper specification, meaning we study (η ζ) that are close to some (η0 0). Since E(η0 0)[ĉn] = c(η0 0) due to ĉn being unbiased under the researcher’s model, the bias of ĉn under any (η ζ) in the reader’s model equals E(η ζ)[ĉn] − c(η ζ)
We investigate claims made in Giacomini and White (2006) and Diebold (2015) regarding the asymptotic normality of a test of equal predictive ability. A counterexample is provided in which, instead, the test statistic diverges with probability 1 under the null.
Auditors frequently use valuation specialists to help them evaluate fair values, but researchers and regulators know little about how auditors use these specialists. Based on interviews with 28 auditors and 14 valuation specialists, I develop a theoretical framework informed by expert systems and professional competition theories. The interviews suggest that institutional pressures in the fair value environment unevenly impact auditors and specialists, causing tension between auditors' needs for ontological security and jurisdictional claims. This tension leads to one‐sided competition between auditors and specialists and incomplete acceptance of specialists' work. Auditors' competitive behaviors coupled with this incomplete acceptance result in a tendency to make specialists' work conform to auditors' views. Collectively, these findings suggest that auditors use specialists as an institutional mechanism to create comfort, but not insight. This study links expert systems and professional competition theories, and it provides critical insight into some assumptions underlying tenets of each theory. It also informs researchers, regulators, and practitioners interested in understanding and addressing problems related to the use of specialists.
Bagnoli and Watts (2005) proposed that a manager could reduce information asymmetry by choosing an income‐decreasing accounting choice that signals the firm's relatively good future prospects. A limitation in testing this theory is that most income‐decreasing accounting choices over time reverse such that aggregated earnings would be the same, regardless of the choice. One income‐decreasing accounting choice that never reverses is the choice of upward asset revaluation, where the resulting gains are recognized through other comprehensive income and reduce future earnings by increasing future depreciation expense. In the United Kingdom, prior to FRS15, firms had the option to upwardly revalue on a one‐time basis. FRS15, and subsequently International Financial Reporting Standards, however, require those firms that upwardly revalue precommit to revalue on a consistent basis. This precommitment sacrifices future reporting discretion, which, according to the aforementioned study, serves as a costly signal of a firm's relatively good future prospects that reduces information asymmetry. The choice not to upwardly revalue, therefore, serves as a signal of a firm's relatively poor future prospects and also reduces information asymmetry, but this choice does not require precommitment such that the reduction in information asymmetry would be less than the choice to precommit to upward revaluations. Using a propensity‐score matched‐pair design on a sample of United Kingdom firms to test our predictions during the period requiring precommitment, we find lower forecast dispersion, lower return volatility, and a lower cost of capital for firms that precommit to upward asset revaluations, relative to those firms that choose not to upwardly revalue their operating assets. Keywords: upward asset revaluations, income‐decreasing accounting choice, information asymmetry, precommitment
We examine whether the information conveyed in a relatively new analyst research output—capital expenditure (capex) forecasts—affects corporate investment efficiency. We find that firms with analyst capex forecasts exhibit higher investment efficiency. This effect is stronger when the forecasts are issued by analysts with higher ability or greater industry knowledge. Moreover, the effect of capex forecasts on investment efficiency varies with the signals they convey about future growth opportunities—positive‐growth signals are more effective in reducing underinvestment, while negative‐growth signals are more effective in reducing overinvestment. Cross‐sectional tests suggest that these effects operate at least in part through both a financing channel and a monitoring channel. Taken together, our results suggest that analysts' capex forecasts convey useful information about firms' growth opportunities to managers and investors, which can facilitate efficient investment.