Knowledge that Transforms

Different concepts of noncausality for continuous time processes, using conditional independence and decomposition of semimartingales, are defined. As in the discrete-time setup, continuous time noncausality is a property concerned with the prediction horizon (global versus instantaneous noncausality) and the nature of the prediction (strong versus weak noncausality). Relations between the resulting continuous time noncausality concepts are then studied for the class of decomposable semimartingales for which, in general, the weak instantaneous noncausality does not imply the strong global noncausality. The paper then characterizes these different concepts in the case of counting processes and Markov processes. Copyright 1996 by The Econometric Society.

Inequality measures are often used to summarize information about empirical income distributions. However the resulting picture of the distribution and of changes in the distribution can be severely distorted if the data are contaminated. The nature of this distortion will in general depend upon the underlying properties of the inequality measure. This issue is investigated theoretically using a technique based on the influence function, and the magnitude of the effect is illustrated using a simulation. Both direct nonparametric estimation from the sample, and indirect estimation using a parametric model are considered; in the latter case the application of a robust estimation procedure is demonstrated. The results are applied to two micro-data examples. Copyright 1996 by The Econometric Society.

The authors study collective choice of fiscal policy in 'federations.' Local policy redistributes across individuals and affects the probability of local shocks. Federal policy shares international risk but may induce local governments to enact policies that increase local risk. The resulting trade-off between risk-sharing and moral hazard is different under alternative fiscal constitutions because the constitutions create different incentives for policymakers and voters and give rise to different political equilibria. The authors specifically contrast vertically ordered systems, like the European Community, with horizontally ordered systems, like the United States. Under appropriate institutions, centralization of functions and power can mitigate the moral hazard problem. Copyright 1996 by The Econometric Society.

Well-behaved infinite signaling games may have no sequential equilibria. The author proves that adding cheap talk to these games 'solves' the nonexistence problem: the limit of sequential equilibrium outcomes of finite approximating games is a sequential equilibrium outcome of the cheap-talk extension of the limit game. In addition, when the signaling space has no isolated points, any cheap-talk sequential equilibrium outcome can be approximated by a sequential [epsilon]-equilibrium of the game without cheap talk. Copyright 1996 by The Econometric Society.

4 Celentani (1996) uses multiple types of short-run players to get around the problem of unobservable off-path behavior of the long-run player in repeated games with observable actions.His approach can be extended to short run players who live for more than one periodo

This paper considers hypothesis tests when the parameter space is restricted under the alternative hypothesis. Multivariate one-sided tests are a leading example. The likelihood ratio (LR) test is shown to be admissible and to maximize power against alternatives that are arbitrarily distant from the null hypothesis. Exact results are established first for Gaussian linear regression models with known variance. Asymptotic analogues are then established for dynamic nonlinear models.

Digitised version produced by the EUI Library and made available online in 2020.

Technological change and deregulation have caused a major restructuring of the telecommunications equipment industry over the last two decades. We estimate the parameters of a production function for the equipment industry and then use those estimates to analyze the evolution of plant level productivity over this period. The restructuring involved significant entry and exit and large changes in the sizes of incumbents. Since firms' choices on whether to liquidate and on the quantities of inputs demanded should they continue depend on their productivity, we use an equilibrium model to suggest an estimation algorithm that takes into account the relationship between productivity on the one hand. and both input demand and survival on the other. A fully parametric version of the estimation algorithm would be both computationally burdensome and require a host of auxiliary assumptions. So we develop a semi parametric technique which is both consistent with a quite general version of the theoretical framework and easy to use. The algorithm produces markedly different estimates of both production function parameters and of productivity movements than traditional estimation procedures. We find an increase in the rate of industry productivity growth after deregulation. This in spite of the fact there was no increase in the average of the plants' rates of productivity growth, and there was actually a fall in our index of the efficiency of the allocation of variable factors conditional on the existing distribution of fixed factors. Deregulation was, however, followed by a reallocation of capital towards more productive establishments (by a down sizing, often shutdown. of unproductive plants and by disproportionate growth of productive establishments) which more than offset the other factors' negative impacts on aggregate productivity.

This paper proposes three classes of consistent tests for serial correlation of the residuals from a linear dynamic regression model. The tests are obtained by comparing a kernel-based spectral density estimator and the null spectral density using three divergence measures. The null normal distributions are invariant whether the regressors include lagged dependent variables. Both asymptotic local and global power properties are investigated. G. Box and D. Pierce's (1970) test can be viewed as a test based on the truncated kernel; many other kernels deliver better power than Box and Pierce's test. A simulation study shows that the new tests have good power against weak and strong dependence. Copyright 1996 by The Econometric Society.

Existence of equilibrium with incomplete markets is problematic because demand functions are typically not continuous. Discontinuities occur at prices for which a marketed asset suddenly becomes redundant. The authors show that this discontinuity disappears if they allow an agent in the economy to introduce a new asset when such redundancies occur. This enables them to prove generic existence with incomplete markets using a standard path-following argument. Moreover, the authors' approach suggests a simple algorithm for computing equilibria when markets are incomplete. They demonstrate this by computing equilibrium for a numerical example. Copyright 1996 by The Econometric Society.