Knowledge that Transforms

This paper estimates a structural model of optimal life-cycle consumption expenditures in the presence of realistic labor income uncertainty. We employ synthetic cohort techniques and Consumer Expenditure Survey data to construct average age-profiles of consumption and income over the working lives of typical households across different education and occupation groups. The model fits the profiles quite well. In addition to providing reasonable estimates of the discount rate and risk aversion, we find that consumer behavior changes strikingly over the life cycle. Young consumers behave as buffer-stock agents. Around age 40, the typical household starts accumulating liquid assets for retirement and its behavior mimics more closely that of a certainty equivalent consumer. Our methodology provides a natural decomposition of saving and wealth into its precautionary and life-cycle components.

This paper presents a new test for fractionally integrated (FI) processes. In particular, we propose a testing procedure in the time domain that extends the well–known Dickey–Fuller approach, originally designed for the I(1) versus I(0) case, to the more general setup of FI(d0) versus FI(d1), with d1<d0. When d0=1, the proposed test statistics are based on the OLS estimator, or its t–ratio, of the coefficient on Δd1yt−1 in a regression of Δyt on Δd1yt−1 and, possibly, some lags of Δyt. When d1 is not taken to be known a priori, a pre–estimation of d1 is needed to implement the test. We show that the choice of any T1/2–consistent estimator of d1∈[0 ,1) suffices to make the test feasible, while achieving asymptotic normality. Monte–Carlo simulations support the analytical results derived in the paper and show that proposed tests fare very well, both in terms of power and size, when compared with others available in the literature. The paper ends with two empirical applications.

Economists have lately been called upon not only to analyze markets, but to design them. Market design involves a responsibility for detail, a need to deal with all of a market's complications, not just its principle features. Designers therefore cannot work only with the simple conceptual models used for theoretical insights into the general working of markets. Instead, market design calls for an engineering approach. Drawing primarily on the design of the entry level labor market for American doctors (the National Resident Matching Program), and of the auctions of radio spectrum conducted by the Federal Communications Commission, this paper makes the case that experimental and computational economics are natural complements to game theory in the work of design. The paper also argues that some of the challenges facing both markets involve dealing with related kinds of complementarities, and that this suggests an agenda for future theoretical research.

The effect of government programs on the distribution of participants' earnings is important for program evaluation and welfare comparisons.This paper reports es- timates of the effects of JTPA training programs on the distribution of earnings.The estimation uses a new instrumental variable (IV) method that measures program impacts on the quantiles of outcome variables.This quantile treatment effects (QTE) estimator accommodates exogenous covariates and reduces to quantile regres- sion when selection for treatment is exogenously determined.The QTE estimator can be computed as the solution to a convex linear programming problem, although this requires first-step estimation of a nuisance function.We develop distribution theory for the case where the first step is estimated nonparametrically.For women, the empirical results show that the JTPA program had the largest proportional impact at low quantiles.Perhaps surprisingly, however, JTPA training raised the quantiles of earnings for men only in the upper half of the trainee earnings distribution.

We consider a general mechanism design setting where each agent can acquire (covert) information before participating in the mechanism. The central question is whether a mechanism exists that provides the efficient incentives for information acquisition ex-ante and implements the efficient allocation conditional on the private information ex-post. It is shown that in every private value environment the Vickrey-Clark-Groves mechanism guarantees both ex-ante as well as ex-post efficiency. In contrast, with common values, ex-ante and ex-post efficiency cannot be reconciled in general. Sufficient conditions in terms of sub- and supermodularity are provided when (all) ex-post efficient mechanisms lead to private under- or over-acquisition of information.

This article concerns an infinite horizon economy where trade must occur pairwise, using a double auction mechanism, and where fiat money overcomes lack of double coincidence of wants. Traders are anonymous and lack market power. Goods are divisible and perishable, and are consumed at every date. Preferences are defined by utility-stream overtaking. Money is divisible and not subject to inventory constraints. The evolution of individual and economywide money holdings distributions is characterized. There is a welfare-ordered continuum of single price equilibria, reflecting indeterminacy of the price level rather than of relative prices.

Without introducing either debt constraints or transversality conditions to avoid the possibility of Ponzi schemes, we show the existence of equilibrium in an infinite horizon incomplete markets economy with a collateral structure.

Do political institutions shape economic policy? I argue that this question should naturally appeal to economists. Moreover, the answer is in the affirmative, both in theory and in practice. In particular, recent theoretical work predicts systematic effects of electoral rules and political regimes on the size and composition of government spending. Results from ongoing empirical work indicate that such effects are indeed present in the data. Some empirical results are consistent with theoretical predictions: presidential regimes have smaller governments and countries with majoritarian elections have smaller welfare-state programs and less corruption. Other results present puzzles for future research: the adjustment to economic events appears highly institution-dependent, as does the timing and nature of the electoral cycle.

We examine a general equilibrium model with asymmetrically informed agents. The presence of asymmetric information generally presents a conflict between incentive compatibility and Pareto efficiency. We present a notion of informational size and show that the conflict between incentive compatibility and efficiency can be made arbitrarily small if agents are of sufficiently small informational size.

The paper by Kiefer, Vogelsang and Bunzel (2000), KVB henceforth, provides an interesting unconventional application of functional limit theory to a conventional problem. In this note, we point out that the limiting distribution of the t^{∗} test proposed by KVB turns out to be equivalent to the asymptotic distribution of one of the statistics analysed by Abadir and Paruolo (1997), AP henceforth. The mixed-Normal random variables studied in AP and KVB are different, but they have identical distributions. The purpose of this note is to prove this equivalence analytically.