The concepr of Economic Reform ia described as a planned shift from one, Pareto inefficient, but quasi-stable, equilibrium (or 'trap') to a new Pareto superior equilibrium which is, or is designed to become, stable too. The concept is applied to recent 'shock' stabilization programs, with special reference to Israel, where the economy was credibiy shifted from a 3-digit inflationary process with considerable inertia, to relative price stability with higher real growth, at only small adjustment costs, by means of a 'heterodox' plan. This two-pronged stabilization program consisted of a substantial correction of budget and external account 'fundamentals' together with a synchronized, wage-price-exchange rate freeze. The idea is theoretically rationalized within a simple dual equilibrium inflation model, for which some econometric estimates are also given.
The value of one in-kind transfer, food stamps, is estimated by evaluating the experience of an actual conversion from stamps to cash in Puerto Rico in 1982. The evidence indicates that the cashout of the stamps had no detectable influence on food expenditures. The explanation partly lies in the distribution of expenditures, for the stamps were inframarginal for most recipients. However, some evidence indicates that trafficking in stamps was widespread as well, including indirect evidence from estimation of the piecewise-linear constraint model. Copyright 1989 by The Econometric Society.
An important application of the theory of choice under uncertainty is to asset markets, and an important property in these markets is a preference for portfolio diversification. If an investor is an expected utility maximizer, then (s)he is risk averse if and only if (s)he exhibits a preference for diversification. This paper examines the relationship between risk aversion and portfolio diversification when preferences over probability distributions of wealth do not have an expected utility representation
IN AN IMPORTANT RECENT PAPER, Hausman and Taylor (1981)-hereafter HT-considered the instrumental-variable estimation of a regression model using panel data, when the individual effects may be correlated with a subset of the explanatory variables. They provided a simple consistent estimator and an efficient estimator. More recently, Amemiya and MaCurdy (1986)-hereafter AM-have suggested an alternative estimator which is more efficient than the HT estimator, under certain conditions and given stronger assumptions than HT made. However, the relationship between the HT and AM papers is less clear than it might be, in part because of notational differences between the two papers. In this paper we clarify the relationship between the HT and AM estimators, and we show that the difference between these estimators lies in the treatment of the time-varying explanatory variables which are uncorrelated with the effects: HT use each such variable as two instruments (means and deviations from means), while AM use such variables as T + 1 instruments (as deviations from means and also separately for each of the T available time periods). This enables us to make clear the conditions under which the AM estimator is more efficient than the HT estimator. We also present each estimator in a form which allows it to be calculated using standard instrumental-variables (two-stage least squares) software. Following the AM path one step further, we then define a third (BMS) estimator which, under yet stronger assumptions, is more efficient than the AM estimator. Both HT and AM use as instruments the deviations from means of the time-varying variables which are correlated with the effects. A more efficient estimator may be obtained by using separately the (T - 1) linearly independent values of these deviations from individual means. Consistency requires that these be legitimate instruments, and whether this is so depends on why these time-varying variables are correlated with the effects. For example, if such correlation arises solely because of a time-invariant component which is removed in taking deviations from individual means, these instruments are legitimate.
In this paper, the authors propose a simple procedure for testing the existence of common roots in lag polynomials. They first show, by using a generalized Bezout property, that this hypothesis can be put under a "mixed" form that is linear with respect to the auxiliary parameters and with respect to the initial parameters. It follows that the test procedures can be implemented only by using regressions packages. Copyright 1989 by The Econometric Society.
This paper deals with the problem of aggregation where the focus of the analysis is whether to predict aggregate variables using macro or micro equations. The GrunfeldGriliches prediction criterion for choosing between aggregate and disaggregate equations is generalized to allow for contemporaneous covariances between the disturbances of micro equations and the possibility of different parametric restrictions on the equations of the disaggregate model. A new test is proposed of the hypothesis of 'perfect aggregation' which tests the validity of aggregation either through coefficient equality or through the stability over time of the composition of the regressors across the micro units. The tools developed in the paper are then applied to employment demand functions for the UK economy disaggregated by 40 industries. Firstly a set of unrestricted log-linear dynamic specifications are estimated for the disaggregate equations and then linear parameter restrictions are imposed as appropriate. Corresponding unrestricted and restricted aggregate equations are estimated. Two different levels of aggregation are considered: aggregation over the 23 manufacturing industries and aggregation over all 40 industries of the economy. In both cases the hypothesis of perfect aggregation is firmly rejected. For the manufacturing industries the prediction criterion marginally favors the aggregate equation but over all industries the disaggregated equations are strongly preferred.
The authors study a differentiated industry in which two firms compete by offering intervals of qualities to heterogenous consumers. They establish conditions which, for perfect competition and monopoly, imply that different consumers choose different qualities. Under these conditions, they show existence and essential uniqueness of a price equilibrium. At all price equilibria in which both firms make a positive profit, discrimination of consumers is incomplete. The authors also discuss the choice of product lines, and show that the Chamberlinian incentive to differentiate its products from those of its competitor dominates for intermediate qualities. Copyright 1989 by The Econometric Society.
Let P be a real-valued function defined on the space of cooperative games with transferable utility, satisfying the following condition: In every game, the marginal contributions of all players (according to P) are efficient (i.e., add up to the worth of the grand coalition). It is proved that there exists just one such function P--called the potential--and moreover that the resulting payoff vector coincides with the Shapley value. The potential approach yields other characterizations for the value; in particular, in terms of a new internal consistency property. Further results deal with weighted values and with the nontransferable utility case. Copyright 1989 by The Econometric Society.
An act maps states of nature to outcomes: deterministic outcomes, as well as random outcomes, are included. Two acts f and g are comonotonic, by definition, if it never happens that f(s) > f(t) and g(t) > g(s) for some states of nature s and t. An axiom of comonotonic independence is introduced here. It weakens the von Neumann-Morgenstern axiom of independence as follows: If f > g and if f, g and h are comonotonic then $f + (1 - $)h > $g + (1 - $)h. If a nondegenerate, continuous, and monotonic (state independent) weak order over acts satisfies comonotonic independence, then it induces a unique non-(necessarily-) additive probability and a von Neumann-Morgenstern utility. Furthermore, one can compute the expected utility of an act with respect to the nonadditive probability, using the Choquet integral. This extension of the expected utility theory covers situations, such as the Ellsberg paradox, which are inconsistent with additive expected utility. The concept of uncertainty aversion and interpretation of comonotonic independence in the context of social welfare functions are included. Copyright 1989 by The Econometric Society.(This abstract was borrowed from another version of this item.)