Knowledge that Transforms

It appears that speculative asset prices tend to show excess volatility relative to simple present value efficient markets models, and that prices are partly forecastable as tending to returning to mean, appropriately defined.' But what does this tell us about how speculative prices are determined? Are there in prices, and if so, how do they behave? The question has arisen recently whether there is really room for fads in speculative prices. Whether or not speculative prices are too volatile, if stock prices are highly correlated with dividends we might conclude that the movements in stock prices are driven by fundamentals, not fads. A question of longer standing is whether fads models that entail feedback from price change to price change are consistent with the observed approximate random walk price behavior, that is, rather low serial correlation of short-run price changes. We can also ask whether the feedback models are consistent with the observed relation of stock prices to dividends and earnings.

EFFECTS OF NORTHWESTREPUBLIC AND TWAOZARK MERGERS ON FARES AT MINNEAPOLISST. PAUL AND ST. LOUIS

The overshooting theory of exchange rates seems ideally designed to explain some important aspects of the movement of the dollar in recent years. Over the period 1981-1984, for example, when real interest rates in the United States rose above those among trading partners (presumably due to shifts in the monetary/fiscal policy mix), the dollar appreciated strongly. It was the higher rates of return that made U.S. assets more attractive to international investors and caused the dollar to appreciate. The overshooting theory would say that, as of 1984 for example, the value of the dollar was so far above its long-run equilibrium that expectations of future depreciation were sufficient to offset the higher nominal interest rate in the minds of international investors. (Figure 1 shows the correlation of the real interest differential with the real value of the dollar, since exchange rates began to float in 1973.)

Financial Economics, International Relations/Trade

This paper presents an experimental test of the proposition that government contributions to public goods, funded by lump-sum taxation, will completely crowd out voluntary contributions. It is found that crowding-out is incomplete and that subjects who are taxed are significantly more cooperative. This is true even though the tax does not affect the Nash equilibrium prediction. This result is taken as evidence for alternative models that assume people experience some private benefit from contributing to public goods.

The information contained in one model's forecast compared to that in another can be assessed from a regression of actual values on predicted values from the two models. The authors do this for forecasts of real GNP growth rates for different pairs of models. The models include a structural model (the Fair model), various versions of the vector autoregressive model, and various versions of a model the authors call the "autoregressive components" model. The authors' procedure requires that forecasts make no use of future information and they have been careful to try to insure this, including using the version of the Fair model that existed in 1976, the beginning of their test period.

We study the selection of an equilibrium for coordination games: symmetric, simultaneous move, complete information games which have multiple, Pareto-ranked Nash equilibria. We design and experiment to explore regularities in the observed outcomes for this class of games. With replication, we find that the Nash equilibrium concept accurately predicts the strategies chosen by players in these games. However, the equilibrium outcome is not always the Pareto-dominant equilibrium so that coordination failures can arise. Moreover, we find that altering the payoffs of a dominated strategy can influence the selection of a Nash equilibrium. Our results are consistent with a modified version of Harsanyi's tracing procedure in which players initially place some positive probability that their opponent is a cooperative player even though the cooperative strategy may be dominated by another strategy.

A social exchange approach to voluntary cooperation is developed on the assumption that voluntary cooperative behavior is motivated by social approval, which is conceptualized as an emotional activity. The associated unique Nash equilibrium may have attractive welfare properties and provides an understanding of spontaneous norm emergence. Furthermore, the opening of a market or government intervention for the collective good is shown to affect voluntary cooperation negatively.