Knowledge that Transforms

Fumio Hayashi, Tohru Inoue, The Relation Between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms, Econometrica, Vol. 59, No. 3 (May, 1991), pp. 731-753

The independence axiom of expected utility theory has recently been weakened to the betweenness axiom. In this paper, an even weaker axiom, called mixture symmetry, is presented. The corresponding functional structure is such that utility is a betweenness functional on part of this domain and quadratic in probabilities elsewhere. The experimental evidence against betweenness provides one motivation for the more general theory presented here. Another advantage of the mixture symmetric class of utility functions is that it is sufficiently flexible to permit the disentangling of attitudes toward risk and toward randomization. Copyright 1991 by The Econometric Society.

An axiomatic model of preferences over lotteries is developed. It is shown that this model is consistent with the Allais paradox, includes expected utility theory as a special case, and is only one parameter (" beta") richer than the expected utility model. Allais paradox type behavior is identified with positive values of "beta." Preferences with positive "beta" are said to be disappointment averse. It is shown that risk aversion implies disappointment aversion and that the Arrow-Pratt measures of risk aversion can be generalized in a straight-forward manner to the current framework. Copyright 1991 by The Econometric Society.

Using Monte Carlo methodology, this paper investigates the effect of dynamics and simultaneity on the finite sample properties of instrumental variables statistics for testing nested and nonnested hypotheses. Simple numerical-analytical formulae (response surfaces) are obtained which closely approximate the statistics' unknown size and power functions for a dynamic simultaneous-equations model. The analysis illustrates the value and limitations of asymptotic theory in interpreting finite sample properties. Two practical results arise. The F form and the Wald statistic is favored over its chi-squared form, and "large-sigma" and small "effective" sample size strongly affect the test of over-identifying restrictions and the Cox-type test. Copyright 1991 by The Econometric Society.

MONOTONICITY OF PREFERENCES is a common assumption in the theory of the core of an economy. It implies that any increase in consumption will be welcomed by a consumer, independent of the reference consumption bundle. Although it seems to be an innocuous assumption, there are several important instances in which monotonicity is not satisfied. The simplest one embraces commodities or services that some economic agents dislike. A second failure of monotonicity is given by satiation points. Many goods may increase the consumer's welfare up to a point, but become a burden if consumed in excess. Goods that must be consumed in fixed proportions constitute yet another exception to the monotonicity assumption. Coffee and cream, and cars and tires are typical examples. In this paper we shall study the relationship between core allocations and the set of competitive equilibria when preferences are not monotonic.

In this paper I discuss economic processes that may give rise to spatial patterns in data, and explore the relative merits of alternative modeling approaches when data are spatially correlated. Specifically, I present an estimation scheme that allows for spatial random effects, and focus attention on cases in which such a framework may be preferred to the more general fixed effects framework that nests it. I use the models presented, together with information on the location of households in an Indonesian socio-economic survey, to test spatial relationships in Indonesian demand for rice.

A state-dependent income tax is incorporated into an intertemporal production economy. Methods are developed for establishing the existence and uniqueness of an equilibrium, and for explicitly constructing this equilibrium. Some tax-policy experiments are suggested, the results of which may have important implications in quantifying the effects of various tax policies.