Knowledge that Transforms

Public announcement, Preannouncements of information, Private information, Price reaction

Stewardship role, Accounting information systems, Management control, Value of information system

Auditing, Litigation, Legal disputes, Auditor trials

IN THE FIELD OF NONCOOPERATIVE GAME THEORY, Nash equilibrium (Nash (1951)) has played a central role as a solution concept. In bold strokes, one may discern two major interpretations of Nash equilibrium in the context of rational players. The first, which is close to the eductive interpretation of Binmore (1987, 1988) and the complete information interpretation of Kaneko (1987), assumes that the game is played exactly once (if it is a repeated game, the repetition occurs once), and the players have sufficient knowledge and ability to analyze the game in a rational manner. Sometimes it is assumed that all players have consistent hierarchies of beliefs, where the game and their priors are common knowledge. Bayesian interpretation such as proposed by Aumann (1987) advanced this idea to the level that the players have a common prior. From this point of view, however, Nash equilibrium seems far from being satisfactory

When changes in the economic policy regime occur stochastically, asset prices will reflect the possibility of such shifts. In this paper we apply techniques of regulated Brownian motion to obtain closed-form analytic price solutions when policy reaction functions are subject to prospective changes. We focus on the case in which the authorities promise to peg a currency's exchange rate once it reaches a predetermined future level. We also show how an open-ended commitment to exchange-rate targeting may lead to multiple equilibria.

The main result of this paper characterizes voting by committees. There are n voters and K objects. Voters must choose a subset of K. Voting by committees is defined by one monotone family of winning coalitions for each object; an object is chosen if it is supported by one of its winning coalitions. This is proven to be the class of all voting schemes satisfying voter sovereignty and nonmanipulability on the domain of separable preferences. The result is analogous to the characterization of Clarke-Groves schemes in that it exhibits the class of all nonmanipulable schemes on an important domain.

We examine the effects of male and female labor supply on household demands and present a simple and robust test for the separability of commodity demands from labor supply. Using data on individual households from six years of the UK FES we estimate a demand system for seven goods which includes hours and participation dummies as conditioning variables. Allowance is made for the possible endogeneity of these conditioning labor supply variables. We find that separability is rejected. Furthermore, we present evidence that ignoring the effects of labor supply leads to bias in the parameter estimates.

The invariance properties of some well known asymptotic tests are studied. Three types of invariance are considered: invariance to the representation of the null hypothesis, invariance to one-to-one transformations of the parameter space (reparameterizations), and invariance to one-to-one transformations of the model variables such as changes in measurement units. Tests that are not invariant include the Wald test and generalized versions of it, a widely used variant of the Lagrange multiplier test, Neyman's C(a) test, and a generalized version of the latter. For all these tests, we show that simply changing measurement units can lead to vastly different answers even when equivalent null hypotheses are tested. This problem is illustrated by considering regression models with Box-Cox transformations on the variables. We observe, in particular, that various consistent estimators of the information matrix lead to test procedures with different invariance properties. General sufficient conditions are then established, under which the generalized C(a) test becomes invariant to reformulations of the null hypothesis and/or to one-to-one transformations of the parameter space as well as to transformations of the variables. In many practical cases where Wald-type tests lack invariance, we find that special formulations of the generalized C(a) test are invariant and hardly more costly to compute than Wald tests. This computational simplicity stands in contrast with other invariant tests such as the likelihood ratio test. We conclude that noninvariant asymptotic tests should be avoided or used with great care. Further, in many situations, the suggested implementation of the generalized C(a) test often yields an attractive substitute to the Wald test (which is not invariant) and to other invariant tests (which are more costly to perform).

This paper analyzes asset prices in a representative agent exchange economy with habit-forming preferences. For a general class of utility indices and endowment processes, the authors characterize the optimal demand for consumption and derive explicit solutions for the interest rate and asset risk premia. They show that consumption smoothness may obtain even when the interest rate is stochastic. The consumption capital asset pricing model may not hold when the endowment process has stochastic coefficients; asset risk premia are larger under mild assumptions. The interest rate depends on the growth in the standard of living. Malliavin calculus is employed in the analysis.