Knowledge that Transforms

This paper examines the abilities of learning models to describe subject behavior in experiments. A new experiment involving multistage asymmetric-information games is conducted, and the experimental data are compared with the predictions of Nash equilibrium and two types of learning model: a reinforcement-based model similar to that used by Roth and Erev (1995), and belief-based models similar to the ‘cautious fictitious play’ of Fudenberg and Levine (1995, 1998) These models make predictions that are qualitatively similar cycling around the Nash equilibrium that is much more apparent than movement toward it. While subject behavior is not adequately described by Nash equilibrium, it is consistent with the qualitative predictions of the learning models. We examine several criteria for quantitatively comparing the predictions of alternative models. According to almost all of these criteria, both types of learning model outperform Nash equilibrium. According to some criteria, the reinforcement-based model performs better than any version of the belief-based model; according to others, there exist versions of the belief-based model that outperform the reinforcement-based model. The abilities of these models are further tested with respect to the results of other published experiments. The relative performance of the two learning models depends on the experiment, and varies according to which criterion of success is used. Again, both models perform better than equilibrium in most cases.

In a public good environment with positively correlated types, we characterize optimal mechanisms when agents have private information and can enter collusive agreements. First, we prove a weak-collusion-proof principle according to which there is no restriction for the principal in offering weak-collusion-proof mechanisms. Second, with this principle, we characterize the set of allocations that satisfy individual and coalitional incentive constraints. The optimal weakly collusion-proof mechanism calls for distortions away from first-best efficiency obtained without collusion. Allowing collusion restores continuity between the correlated and the uncorrelated environments. When the correlation becomes almost perfect, first-best efficiency is approached. Finally, the optimal collusion-proof mechanism is strongly ratifiable.

This paper studies the extent to which qualitative features of Walrasian equilibria are refutable given a nite data set. In particular, we consider the hypothesis that the observed data are Walrasian equilibria in which each price vector is locally stable under t^atonnement. Our main result shows that a nite set of observations of prices, individual incomes and aggregate consumption vectors is rationalizable in an economy with smooth characteristics if and only if it is rationalizable in an economy in which each observed price vector is locally unique and stable under t^atonnement. Moreover, the equilibrium correspondence is locally monotone in a neighborhood of each observed equilibrium in these economies. Thus the hypotheses that equilibria are locally stable under t^atonnement, equilibrium prices are locally unique and equilibrium comparative statics are locally monotone are not refutable with a nite data set. 1

The supply and price of skilled labor relative to unskilled labor have changed dramatically over the postwar period. The relative quantity of skilled labor has increased substantially, and the skill premium, which is the wage of skilled labor relative to that of unskilled labor, has grown significantly since 1980. Many studies have found that accounting for the increase in the skill premium on the basis of observable variables is difficult and have concluded implicitly that latent skill-biased technological change must be the main factor responsible. This paper examines that view systematically. We develop a framework that provides a simple, explicit economic mechanism for understanding skill-biased technological change in terms of observable variables, and we use the framework to evaluate the fraction of variation in the skill premium that can be accounted for by changes in observed factor quantities. We find that with capital-skill complementarity, changes in observed inputs alone can account for most of the variations in the skill premium over the last 30 years.

Many open-access resources, such as elephants, are used to produce storable goods. Anticipated future scarcity of these resources will increase current prices and poaching. This implies that, for given initial conditions, there may be rational expectations equilibria leading to both extinction and survival. The cheapest way for governments to eliminate extinction equilibria may be to commit to tough antipoaching measures if the population falls below a threshold. For governments without credibility, the cheapest way to eliminate extinction equilibria may be to accumulate a sufficient stockpile of the storable good and threaten to sell it should the population fall.

How Much Should Americans Be Saving for Retirement? by B. Douglas Bernheim, Lorenzo Forni, Jagadeesh Gokhale and Laurence J. Koltikoff. Published in volume 90, issue 2, pages 288-292 of American Economic Review, May 2000

In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also have a perverse effect of harming banks' franchise values, thus encouraging gambling. Pareto-efficient outcomes can be achieved by adding deposit-rate controls as a regulatory instrument, since they facilitate prudent investment by increasing franchise values. Even if deposit-rate ceilings are not binding on the equilibrium path, they may be useful in deterring gambling off the equilibrium path.

This paper provides a consistent international comparison of the patterns of growth in Canadian and U.S. industries. While much previous work has been done comparing sectoral (total factor) productivity in these two countries, the methods are not entirely comparable. Our approach here is to use methods and definitions that are almost identical for the two countries and therefore to provide a better sense of the relative productivity performance of the two countries. Our methodology for international comparisons of growth in output, inputs, and productivity is based on the economic theory of production. We use measures of labor and capital that take into account the changing composition of the labor force and capital stocks (relatively more educated and older workers, and relatively more equipment compared to structures). We find that, during the 1961–1973 period, Canadian industries were able to bring their productivity levels closer to U.S. levels, and they also had a higher rate of output growth. However, the growth in output and productivity slowed down after 1973 in both countries. As a result, the gap in the level of productivity between the Canadian and U.S. industries has remained virtually unchanged since 1973. Looking closely at the sources of industrial output growth, we find that input growth is the predominant source of the growth for almost all industries in the two countries over the 1961– 1995 period. Productivity growth contributes, on average, only about 20 percent of the growth of industrial output in the two countries over this period.