On the conversion of ruble trade flows into dollars

A simple approach is developed for analyzing the possible bias involved in converting CMEA countries' statistics on transferable ruble (TR) trade into dollars. This bias is a function of the degree of price distortion in TR trade and whether the conversion is made “backward” using the TR/dollar rate set by the CMEA, or “forward” using the country's official cross rate between the TR and the dollar. Illustrative calculations of conversion bias for the European members of the CMEA for 1983 show considerable differences in “forward” conversion bias among some of these countries, given identical hypothetical price distortions in each country's TR trade.     

Voting about immigration policy: What does the Swiss experience tell us?

This paper draws on Swiss direct democracy to review the Swiss experience with immigration, which has been shaped strongly by regular voting on immigration policies. Relying on two unique post-vote data-sets on how Swiss citizens voted on initiatives directed at containing the proportion of foreigners in the population, we improve on past empirical evidence by by-passing the problem of “hypothetical bias” present in the analysis of conventional survey data. Controlling for the participation bias due to non-mandatory voting, we find evidence that the hypothetical bias hampering pre-vote surveys may be large but that turnout does not have a decisive influence on the outcome of a vote. Confirming political–economy predictions, education matters in the shaping of immigration preferences but non-economic arguments also play an important role.     

Self-Serving Cheap Talk: A Test Of Aumann's Conjecture

The effectiveness of pre-play communication in achieving efficient outcomes has long been a subject of controversy. Aumann conjectures that, in a variant of the Stag Hunt game, “an agreement to play [the efficient outcome] conveys no information about what the players will do” and thus should not affect behavior. Farrell and Rabin suspect that cheap talk will achieve efficiency. Results show impressive coordination when the sender first chooses a signal and then an action. Without communication, efforts to achieve efficiency are largely unsuccessful. As Farrell suggests, reversing the order of the action and signal appears to change players' behavior. Journal of Economic Literature Classification Numbers: A13, C72, C91, D82, D84.     

Willingness to pay for a Green Energy program: A comparison of ex-ante and ex-post hypothetical bias mitigation approaches

The most persistently troubling empirical result in the contingent valuation method literature is the tendency for hypothetical willingness to pay to overestimate real willingness to pay. Two approaches, ex-ante and ex-post, have been developed to mitigate or eliminate the overstatement of hypothetical willingness to pay. The ex-ante approach addresses hypothetical bias in the survey design stage while the ex-post approach addresses hypothetical bias with follow-up questions to the hypothetical willingness to pay question. We find that willingness to pay estimates are similar when either the ex-ante or ex-post approach are employed. Our results suggest that the approaches should be considered as complements and not substitutes. Employing both approaches to mitigate hypothetical bias we estimate that the annual benefits of the regional amenities associated with a Green Energy program in North Carolina are $186 million.     

Testing the Effectiveness of Certainty Scales,Cheap Talk,and Dissonance-Minimization in Reducing Hypothetical Bias in Contingent Valuation Studies

Stated preference methods such as contingent valuation and choice modeling are subject to various biases that may lead to differences between actual and hypothetical willingness to pay. Cheap talk, follow-up certainty scales, and dissonance minimization are three techniques for reducing this hypothetical bias. Cheap talk and certainty scales have received considerable attention in the literature, but dissonance minimization has not previously been experimentally tested. Using a four-way split sample design involving over 600 subjects, results from an actual referendum on provision of a quasi-public good were compared with three similar but contingent referenda employing the three bias-reducing techniques. Hypothetical bias was again present. Certainty scales, when properly calibrated, and dissonance minimization were found to be most effective in reducing the bias.     

Addressing causality in the effect of capital account liberalization on growth

Evidence supporting the positive effects of capital account liberalization on growth is mixed at best. Even after conditioning on the quality of domestic financial institutions, a significant number of studies still find no effect. One possible explanation is reverse causation. If low growth countries liberalize in order to spur growth, the observed correlation between growth and liberalization will underestimate the impact of capital account openness. To eliminate this bias, I instrument capital account liberalization with the average level of openness of other countries to capture the “fad” element in financial liberalization. IV estimates indicate a significant positive effect of liberalization on growth, confirming the predictions of economic theory.     

Self-enforced collusion through comparative cheap talk in simultaneous auctions with entry

Campbell (J Econ Theory 82:425–450, 1998) develops a self-enforced collusion mechanism in simultaneous auctions based on complete comparative cheap talk and endogenous entry, with two bidders. His result is difficult to generalize to an arbitrary number of bidders, since the entry-decision stage of the game is characterized by strategic substitutes. This paper analyzes more-than-two-bidder, symmetric-prior cases. Two results are proved: (1) as the number of objects grows large, a full comparative cheap talk equilibrium exists and it yields asymptotically fully efficient collusion; and (2) there is always a partial comparative cheap talk equilibrium. All these results are supported by intuitive equilibria at the entry-decision stage (J Econ Theory 130:205–219, 2006; Math Soc Sci 2008, forthcoming). Numerical examples suggest that full comparative cheap talk equilibria are not uncommon even with few objects.     

A Meta-analysis of Hypothetical Bias in Stated Preference Valuation

Individuals are widely believed to overstate their economic valuation of a good by a factor of two or three. This paper reports the results of a meta-analysis of hypothetical bias in 28 stated preference valuation studies that report monetary willingness-to-pay and used the same mechanism for eliciting both hypothetical and actual values. The papers generated 83 observations with a median ratio of hypothetical to actual value of only 1.35, and the distribution has severe positive skewness. We find that a choice-based elicitation mechanism is important in reducing bias. We provide some evidence that the use of student subjects may be a source of bias, but since this variable is highly correlated with group experimental settings, firm conclusions cannot be drawn. There is some weak evidence that bias increases when public goods are being valued, and that some calibration methods may be effective at reducing bias. However, results are quite sensitive to model specification, which will remain a problem until a comprehensive theory of hypothetical bias is developed.JEL classifications: C9, H41, Q26, Q28     

Equilibrium selection in experimental cheap talk games

In the past, many refinements have been proposed to select equilibria in cheap talk games. Usually, these refinements were motivated by a discussion of how rational agents would reason in some particular cheap talk games. In this paper, we propose a new refinement and stability measure that is intended to predict actual behavior in a wide range of cheap talk games. According to our Average Credible Deviation Criterion (ACDC), the stability of an equilibrium is determined by the frequency and size of credible deviations. ACDC organizes the results from several cheap talk experiments in which behavior converges to equilibrium, even in cases where other criteria do not make a prediction.     

Results on the bias and inconsistency of ordinary least squares for the linear probability model

This note formalizes bias and inconsistency results for ordinary least squares (OLS) on the linear probability model and provides sufficient conditions for unbiasedness and consistency to hold. The conditions suggest that a “trimming estimator” may reduce OLS bias.     

Concatenate coordination and mutual coordination

We tell of the evolving meaning of the term coordination as used by economists. The paper is based on systematic electronic searches (on “coord,” etc.) of major works and leading journals. The term coordination first emerged in professional economics around 1880, to describe the directed productive concatenation of factors or activities within a firm. Also, transportation economists used the term to describe the concatenation of routes and trips of a transportation system. These usages represent what we term concatenate coordination. The next major development came in the 1930s from several LSE economists (Hayek, Plant, Hutt, and Coase), who extended that concept beyond the eye of any actual coordinator. That is, they wrote of the concatenate coordination of a system of polycentric or spontaneous activities. These various applications of concatenate coordination prevailed until the next major development, namely, Thomas Schelling and game models. Here coordination referred to a mutual meshing of actions. Game theorists developed crisp ideas of coordination games (like “battle of the sexes”), coordination equilibria, convention, and path dependence. This “coordination” was not a refashioning, but rather a distinct concept, one we distinguish as mutual coordination. As game models became more familiar to economists, it was mutual coordination that economists increasingly had in mind when they spoke of “coordination.” Economists switched, so to speak, to a new semantic equilibrium. Now, mutual coordination overshadows the older notion of concatenate coordination. The two senses of coordination are conceptually distinct and correspond neatly to the two dictionary definitions of the verb to coordinate. Both are crucial to economics. We suggest that distinguishing between the two senses can help to clarify “coordination” talk. Also, compared to talk of “efficiency” and “optimality,” concatenate coordination allows for a richer, more humanistic, and more openly aesthetic discussion of social affairs. The narrative is backed up by Excel worksheets that report on systematic content searches of the writings of economics using the worldwide web and, using JSTOR, of Quarterly Journal of Economics, Economic Journal, Journal of Political Economy, American Economic Review, and Economica.     

INFORMATIONAL CASCADES ELICIT PRIVATE INFORMATION*

We introduce cheap talk in a dynamic investment model with information externalities. We first show how social learning adversely affects the credibility of cheap talk messages. Next, we show how an informational cascade makes truth‐telling incentive compatible. A separating equilibrium only exists for high‐surplus projects. Both an investment subsidy and an investment tax can increase welfare. The more precise the sender's information, the higher her incentives to truthfully reveal her private information.     

For those about to talk we salute you: an experimental study of credible deviations and ACDC

We test the Average Credible Deviation Criterion (ACDC), a stability measure and refinement for cheap talk equilibria introduced in De Groot Ruiz et al. (Equilibrium selection in cheap talk games: ACDC rocks when other criteria remain silent, Working paper, University of Amsterdam 2012a). ACDC has been shown to be predictive under general conditions and to organize data well in previous experiments meant to test other concepts. In a new experimental setting, we provide the first systematic test of whether and to which degree credible deviations matter for the stability of cheap talk equilibria. Our principal experimental result is that in a setting where existing concepts are silent, credible deviations matter and matter gradually, as predicted by ACDC.     

Comparative cheap talk

When are comparative statements credible? We show that simple complementarity conditions ensure that an expert with private information about multiple issues can credibly rank the issues for a decision maker. By restricting the expert's ability to exaggerate, multidimensional cheap talk of this form permits communication when it would not be credible in a single dimension. The communication gains can be substantial with even a couple of dimensions, and the complete ranking is asymptotically equivalent to full revelation as the number of issues becomes large. Nevertheless, partial rankings are sometimes more credible and/or more profitable for the expert than the complete ranking. Comparative cheap talk is robust to asymmetries that are not too large. Consequently, for sufficiently many independent issues, there are always some issues sufficiently symmetric to permit comparative cheap talk.     

Averting economic collapse and the solipsism bias

We study the behavior of experimental subjects who have to make a sequence of risky investment decisions in the presence of network externalities. Subjects follow a simple heuristic—investing after positive experiences and reducing their propensity to invest after a failure. This result contrasts with the theoretical findings of Jeitschko and Taylor [Jeitschko, T.D., Taylor, C., 2001. Local discouragement and global collapse: A theory of coordination avalanches. Amer. Econ. Rev. 91 (1), 208–224] in which even agents who have only good experiences eventually stop investing because they account for the fact that others with worse experiences will quit. This can trigger sudden economic collapse—a coordination avalanche—even in the most efficient Bayesian equilibrium. In the experiment, subjects follow their own experiences and disregard the possible bad experiences of others—thus exhibiting behavior that we term “solipsism bias.” Solipsism results in sustained investment activity and thus averts complete collapse.     

Globally evolutionarily stable portfolio rules

The paper examines a dynamic model of a financial market with endogenous asset prices determined by short-run equilibrium of supply and demand. Assets pay dividends that are partially consumed and partially reinvested. The traders use fixed-mix investment strategies (portfolio rules), distributing their wealth between assets in fixed proportions. Our main goal is to identify globally evolutionarily stable strategies, allowing an investor to “survive,” i.e., to accumulate in the long run a positive share of market wealth, regardless of the initial state of the market. It is shown that there is a unique portfolio rule with this property—an analogue of the famous Kelly rule of “betting your beliefs.” A game theoretic interpretation of this result is given.     

Multidimensional cheap talk with sequential messages

This paper studies a two-dimensional cheap talk game with two senders and one receiver. The senders possess the same information and sequentially send messages about that information. In one-dimensional sequential message cheap talk games where the state space is unbounded, the information is fully transmitted under the self-serving belief, as suggested by Krishna and Morgan (2001b). However, this result depends crucially on the structure of the one-dimensional model. It generally does not hold in two-dimensional models. We consider the extended self-serving belief, which implies full information transmission even if the self-serving belief cannot work. Then, we show that the necessary and sufficient condition for the existence of the fully revealing equilibrium is that the senders have opposing-biased preferences.