Knowledge that Transforms

If the value of a commodity is unknown, a prospective buyer must realize that a bid based on an overestimate of its value is likely to be accepted. In this situation, merely finding out that one’s bid is accepted may cause one to reduce the estimate of a commodity’s value, so an auction can bring a feeling of regret. 1 Acceptance of a bid is an informative event, and failure to incorporate this contingent information into the bidding strategy can lead to excessive bids and subsequent losses, a result widely known as the 2 There is considerable anecdotal evidence that bidders for a prize of uncertain value fall prey to the winner’s curse, and persistent overbidding has also been observed in laboratory experiments. 3 There is a second factor that can also induce overbidding: the thrill of winning. This raises the possibility that overbidding is due to a utility of winning instead of being the result of an irrational failure to anticipate the informational content of a bid’s acceptance. One way to distinguish these explanations is to examine a situation in which the winner’s curse effect is neutralized, to see if bids are still too high. In order to neutralize the winner’s curse, we identify an opposing bias: a situation in which a failure to anticipate the informational content of a bid’s acceptance will cause one to bid below the optimal bid, resulting in a Since the loser’s curse produces underbidding, its effect is the opposite of that arising from the winner’s curse.

The koyck (geometric) lag or AR(1) specification is a commonly proposed behavioral model, sometimes after differencing. The distribution of koyck lag or AR(1) coefficients across agents in an economy is shown to be completely identified just from the dynamic behavior of aggregate (macroeconomic) data. Aggregate testable implications of an economy composed of agents having koyck lags or AR(1) models are provided. Extensions to higher-order and time-varying lags are discussed. Aggregate U.S. consumption data are shown to support the hypothesis that some consumers have random-walk consumption, while the rest have ARIMA (1, 1, 0) consumption with widely varying AR coefficients. Copyright 1994 by American Economic Association.

In Nozick (1974), I described how, if people entered into mutual protection agreements and firms offered buyers protective services, a dominant protection agency would arise by legitimate steps, and this would constitute at least an ultra-minimal state. No one need have intended to produce a state. A pattern or institutional structure that apparently only could arise by conscious design instead can originate or be maintained through the interactions of agents having no such overall pattern in mind. Following Adam Smith, I termed such a process or explanation an invisible-hand process or explanation and offered a list of examples to make the phenomenon salient. These included evolutionary explanations of the traits of organisms and populations, microeconomic explanations of equilibria, Carl Menger's explanation of how a medium of exchange arises, and Thomas Schelling's model of residential segregation. (Edna Ullmann-Margalit [1978] is a later attempt to define the concept.) Two types of processes seemed important: filtering processes wherein some filter eliminates all entities not fitting a certain pattern, and equilibrium processes wherein each component part adjusts to local conditions, changing the local environments of others close by, so the sum of the local adjustments realizes a pattern. The pattern produced by the adjustments of some entities might itself constitute a filter another faces. The opposite kind of explanation, wherein an apparently unintended, accidental, or unrelated set of events is shown to result from intentional design, I termed a hidden-hand explanation. The notion of invisible-hand explanation is descriptive, not normative. Not every pattern that arises by an invisible-hand process is desirable, and something that can arise by an invisible-hand process might better arise or be maintained through conscious intervention. Economics typically explains patterns in terms of the actions of rational agents. However, a disaggregated theory of the agent herself, wherein patterns that seem to indicate a central and unified directing agent are instead explained as the result of smaller, non-agent entities interacting, also might count as an invisible-hand explanation.1 The definitional details of what counts as invisible hand are less interesting than the particular theories.2 Time preference seems susceptible to evolutionary explanation (see Nozick, 1977; and Nozick, 1993 pp. 14-15). The future is uncertain, an organism may not survive to reap an anticipated reward, or the world might not present it. Innate time preference

Price-discrimination practices are common, but they typically are analyzed in a framework in which firms sell directly to end users (Louis Phlips, 1981; Richard Schmalensee, 1981; Hal Varian, 1985; Gerstner and Holthausen, 1986). This direct-channel framework is valid for service industries such as entertainment and travel, where senior citizens buy reduced-price tickets to musical concerts, and children receive discounts on airfares and movietheater tickets. In the packaged-goods and durable-goods industries, however, manufacturers sell to retailers who sell to consumers. In indirect channels like these, price discrimination occurs when manufacturers target discounts1 to price-conscious consumers in the form of coupons and rebates. Consumers who do not use these discounts pay higher net prices. Because manufacturers cannot dictate consumer prices to retailers, analysis of price discrimination ought to take into account the pricing behavior of retailers (Michael Katz, 1987; Gerstner and Hess, 1991). While some researchers have studied coupons as a means for price discrimination (William Levedahl, 1984; Chakravarthi Narasimhan, 1984), they have done so in a direct-channel context and have ignored the role of retailers or other middlemen in the pricing and couponing process. In this paper we study price discrimination within a channel of distribution consisting of a single manufacturer and competitive retailers. In the model, the manufacturer pricediscriminates using a pull discount targeted at consumers with low reservation prices to reduce the net price these consumers pay for the product. Some consumers with higher reservation prices, who self-select not to use the discount, pay the full retail price for the product. The manufacturer chooses the wholesale price for the firm's product and the size of the price-discriminating pull discount, taking as given the markup percentage used by retailers. Joint determination of the manufacturer discount and retail markup is also considered. The paper's major finding is that a higher retail markup percentage influences the manufacturer to use price discrimination in a less intensive way (i.e., to reduce the size of the equilibrium pull discount as well as the wholesale price). The intuition behind this result is as follows. The greater the retail markup percentage, for a given wholesale price, the greater will be the retail price. The greater the retail price, the larger the pull discount will have to be to keep the low-reservation-price consumers in the market. But the manufacturer bears the entire cost of the discount, and a larger discount induces more nontargeted customers to use it. These two effects make price discrimination less profitable when markup percentage increases, so the manufacturer reduces its pull discount and in*Gerstner: Graduate School of Management, University of California, Davis, CA 95616, and Department of Economics, Haifa University, Haifa 31999, Israel; Hess: Department of Business Administration, University of Illinois, Champaign, IL 61820; Holthausen: Department of Economics, North Carolina State University, Box 7507, Raleigh, NC 27695. We thank Alastair Hall, Jeongwen Chiang, Randy Cooke, and Nick Ruotolo for their comments and assistance. 1Manufacturers who distribute products through retailers use push or techniques to increase sales. Under push, manufacturers offer inducements to retailers. When consumers shop for the product, the retailer has an incentive to promote the brand, thus pushing it through to consumers. Under pull, manufacturers offer incentives such as coupons or rebates directly to consumers. The manufacturers hope that demand will be pulled through the channel by consumers asking retailers for the promoted brand.

This paper characterizes equilibrium exclusionary contracts between buyers, an incumbent firm, and a potential entrant when buyers can either vertically integrate or contract with the outside entrant. In this setting, exclusionary contracts are generally shown to be efficient and to deter inefficient entry that would otherwise occur. With multiple unorganized buyers, equilibrium contracts are shown to take a 'divide-and-conquer' form and, in some cases, to deter some efficient entry. In such cases, efficient contracting can be restored by a policy that prohibits price discrimination and gives agents free reign to sign exclusionary agreements. Copyright 1994 by American Economic Association.

For over a decade, Garrison Keillor assured listeners of American Public Radio's A Prairie Home Companion that in the women are strong, all the men are good-looking, and all the children are above average (Judith Yaross Lee, 1991). Although we can offer no explanation for the women's strength and men's appearance, we may be able to shed light on the reports of exceptional achievement of Wobegon's children. Our research indicates that students tend to overstate their academic accomplishments, and that belowaverage students are less likely to report their achievements at all. This produces a Lake Wobegon effect in student selfreported data. Overstated achievement may produce biased estimates of the relationship between achievement and educational inputs, if overstatement is correlated with achievement. In economic education, the use of student self-reported data for empirical analysis is not uncommon. Both the National Assessment of Economic Education data base and the third edition of the Test of Understanding in College Economic data base use some self-reported data. In addition, some economic-education researchers develop their own data sets that include student self-reported data. Systematic reporting biases in data collection also create problems for empirical analysis. Nonrandom reporting has been documented as a potential problem in economic education. Students are more likely to report grading errors on examinations when the correction of these errors results in raising their grades (Dale 0. Cloninger and Robert Hodgin, 1986). Sample selection bias resulting from using an unrepresentative sample has been shown to result from data lost between pretests and posttests (William E. Becker and William B. Walstad, 1990), students' failure to take standardized tests (Claude Montmarquette and Rachel Houle, 1986), and selection procedures used to place students in experimental and control groups (John J. Siegfried and George H. Sweeney, 1980).