Knowledge that Transforms

We study a coordination game with randomly changing payoffs and small frictions in changing actions. Using only backwards induction, we find that players must coordinate on the risk-dominant equilibrium. More precisely, a continuum of fully rational players are randomly matched to play a symmetric 2×2 game. The payoff matrix changes according to a random walk. Players observe these payoffs and the population distribution of actions as they evolve. The game has frictions: opportunities to change strategies arrive from independent random processes, so that the players are locked into their actions for some time. As the frictions disappear, each player ignores what the others are doing and switches at her first opportunity to the risk-dominant action. History dependence emerges in some cases when frictions remain positive.

Potential games are games with potential functions.Technically, the potential function defines a refinement concept.We provide justification for this refinement concept using the notion of robustness of equilibria.A Nash equilibrium of a complete information game is said to be robust if every incomplete information game where payoffs are almost always given by the complete information game has an equilibrium which generates behavior close to the Nash equilibrium.We show that Nash equilibria that maximize potential functions are generically robust.

In expected utility theory, risk attitudes are modeled entirely in terms of utility. In the rank-dependent theories, a new dimension is added: chance attitude, modeled in terms of nonadditive measures or nonlinear probability transformations that are independent of utility. Most empirical studies of chance attitude assume probabilities given and adopt parametric fitting for estimating the probability transformation. Only a few qualitative conditions have been proposed or tested as yet, usually quasi-concavity or quasi-convexity in the case of given probabilities. This paper presents a general method of studying qualitative properties of chance attitude such as optimism, pessimism, and the "inverse-S shape" pattern, both for risk and for uncertainty. These qualitative properties can be characterized by permitting appropriate, relatively simple, violations of the sure-thing principle. In particular, this paper solves a hitherto open problem: the preference axiomatization of convex ("pessimistic" or "uncertainty averse") nonadditive measures under uncertainty. The axioms of this paper preserve the central feature of rank-dependent theories, i.e. the separation of chance attitude and utility.

The logic of the linkage principle of Milgrom and Weber (1982) extends to price discrimination. A non-linear pricing monopolist who sells to a single buyer always prefers to commit to publicly reveal information affiliated to the valuation of the buyer. This is also valid when the value of the buyer affects the opportunity cost of the seller.

This paper compares two different models in a common environment. The first model has liquidity constraints in that consumers save a single asset that they cannot sell short. The second model has debt constraints in that consumers cannot borrow so much that they would want to default, but is otherwise a standard complete markets model. Both models share the features that individuals are unable to completely insure against idiosyncratic shocks and that interest rates are lower than subjective discount rates. In a stochastic environment, the two models have quite different dynamic properties, with the debt constrained model exhibiting simple stochastic steady states, while the liquidity constrained model has greater persistence of shocks.

A new method is proposed for constructing confidence intervals in autoregressive models with linear time trend. Interest focuses on the sum of the autoregressive coefficients because this parameter provides a useful scalar measure of the long-run persistence properties of an economic time series. Since the type of the limiting distribution of the corresponding OLS estimator, as well as the rate of its convergence, depend in a discontinuous fashion upon whether the true parameter is less than one or equal to one (that is, trend-stationary case or unit root case), the construction of confidence intervals is notoriously difficult. The crux of our method is to recompute the OLS estimator on smaller blocks of the observed data, according to the general subsampling idea of Politis and Romano (1994a), although some extensions of the standard theory are needed. The method is more general than previous approaches in that it works for arbitrary parameter values, but also because it allows the innovations to be'-a martingale difference sequence rather than i.i.d .. Some simulation studies examine the finite sample performance.

The ready-to-eat cereal industry is characterized by high concentration, high price-cost margins, large advertising-to-sales ratios, and numerous introductions of new products. Previous researchers have concluded that the ready-to-eat cereal industry is a classic example of an industry with nearly collusive pricing behavior and intense nonprice competition. This paper empirically examines this conclusion. In particular, I estimate price-cost margins, but more importantly I am able empirically to separate these margins into three sources: (i) that which is due to product differentiation; (ii) that which is due to multi-product firm pricing; and (iii) that due to potential price collusion. The results suggest that given the demand for different brands of cereal, the first two effects explain most of the observed price-cost margins. I conclude that prices in the industry are consistent with noncollusive pricing behavior, despite the high price-cost margins. Leading firms are able to maintain a portfolio of differentiated products and influence the perceived product quality. It is these two factors that lead to high price-cost margins.

This paper establishes a general form of the "payoff equivalence" result in mechanism design theory: under certain conditions, the utility of any type in an incentive-compatible mechanism is determined up to an additive constant by the allocation rule alone. When types are single-dimensional the result is well known (see, for instance, Myerson (1981)). When types are multi-dimensional the result follows from the Fundamental Theorem of Calculus once sufficient smoothness is assumed. We obtain a more general result by using an extension of the Fundamental Theorem to nonsmooth convex functions and more generally, to the class of regular Lipschitzian functions.

The Legacy of U.S. Educational Leadership: Notes on Distribution and Economic Growth in the 20th Century by Claudia Goldin and Lawrence F. Katz. Published in volume 91, issue 2, pages 18-23 of American Economic Review, May 2001