Sustainable growth in a model with dual-rate discounting

In an important model of growth and pollution proposed by Stokey [Int. Econ. Rev. 39 (1998) 1] neither the rate of economic growth nor the rate of growth of emissions depends on the time preference of the representative agent, which seems somewhat paradoxical. To resolve this paradox, we introduce into Stokey's model the assumption of dual-rate discounting, prove the existence of a sustainable balanced growth optimal path, and show that the growth rates of output and emissions are increasing in the proportion between the consumption and the environmental discount factors of the representative agent.     

Robust control and model misspecification

A decision maker fears that data are generated by a statistical perturbation of an approximating model that is either a controlled diffusion or a controlled measure over continuous functions of time. A perturbation is constrained in terms of its relative entropy. Several different two-player zero-sum games that yield robust decision rules are related to one another, to the max-min expected utility theory of Gilboa and Schmeidler [Maxmin expected utility with non-unique prior, J. Math. Econ. 18 (1989) 141-153], and to the recursive risk-sensitivity criterion described in discrete time by Hansen and Sargent [Discounted linear exponential quadratic Gaussian control, IEEE Trans. Automat. Control 40 (5) (1995) 968-971]. To represent perturbed models, we use martingales on the probability space associated with the approximating model. Alternative sequential and nonsequential versions of robust control theory imply identical robust decision rules that are dynamically consistent in a useful sense.     

A life-cycle model of outmigration and economic assimilation of immigrants in Germany

This paper estimates a forward-looking life-cycle model of outmigration and labor force participation. The estimated model is used to evaluate the impact of enforcing a maximum stay duration for newly admitted immigrants on labor force participation and outmigration. Restricting the migration duration is found to have little effect on the labor force participation of skilled immigrants, and a negative effect on that of unskilled immigrants. Restricting the migration duration is also found to encourage the departure of unskilled and unsuccessful immigrants before the maximum duration is reached. These results are obtained by estimating the model with data that contain no information on outmigration decisions. It is shown that the assumption of a continuous state variable affecting attrition only through outmigration allows the probability of outmigration to be identified from the panel attrition. This probability can then be estimated using standard dynamic programming techniques. The migration durations so estimated are found to differ substantially from those estimated under the assumption that immigrants are myopic decision makers.     

Amenity driven price effects and conservation reserve site selection: A dynamic linear integer programming approach

Most conservation reserve design models presented in the literature are static and ignore the dynamic economic aspects of site selection. Typically conservation programs operate under time-related (e.g. annual) budgets and purchase land over time in a sequential manner. The uncertainty of land development has been incorporated in a few dynamic reserve selection formulations using stochastic dynamic programming. However, the existing formulations do not explicitly deal with inter-temporal price and location linkages. We address this issue here and present a two-period linear integer programming model for conservation reserve design that incorporates amenity driven price feedback effects inherent in the reserve development problem. In addition, the model includes spatial and ecological criteria. We then use this model to answer the question “How suboptimal is ignoring amenity driven price effects in reserve design models?” We apply the model to artificially generated data sets and compare the results with the results of an iterated static model that considers only one period at a time. We find that the dynamic model with price feedback effects selects sites at a lower per-site cost. The policy implication of this finding is that conservation programs should avoid purchasing land in the same neighborhood over multiple time periods.     

Efficiency and information aggregation in large uniform-price auctions

We prove that the equilibria of a large interdependent-value, uniform-price auction model where bidders have arbitrary preferences for multiple units can be approximated by a nonatomic exchange economy. We show that the uniform-price auction is approximately efficient with a large number of participants and asymptotically aggregates idiosyncratic bidder information into the market price. More generally our analysis framework provides conditions justifying the use of nonatomic limit model approximations to analyze the large-market behavior of game-theoretic models. We demonstrate continuity requirements on the economic primitives sufficient for the equilibrium strategies of the two models to converge as the number of participants in the finite game approaches infinity.     

The nucleolus of large majority games

Members of a shareholder meeting or legislative committee have greater or smaller voting power than meets the eye if the nucleolus of the induced majority game differs from the voting weight distribution. We establish a new sufficient condition for the weight and power distributions to be equal, and we characterize the limit behavior of the nucleolus in case all relative weights become small.     

Interim Bayesian Nash equilibrium on universal type spaces for supermodular games

We prove the existence of a greatest and a least interim Bayesian Nash equilibrium for supermodular games of incomplete information. There are two main differences from the earlier proofs and from general existence results for non-supermodular Bayesian games: (a) we use the interim formulation of a Bayesian game, in which each player's beliefs are part of his or her type rather than being derived from a prior; (b) we use the interim formulation of a Bayesian Nash equilibrium, in which each player and every type (rather than almost every type) chooses a best response to the strategy profile of the other players. There are no restrictions on type spaces and action sets may be any compact metric lattices.     

Monotone equilibria in Bayesian games of strategic complementarities

For Bayesian games of strategic complementarities, we provide a constructive proof of the existence of a greatest and a least Bayesian Nash equilibrium, each one in strategies that are monotone in type. Our main assumptions, besides strategic complementarities, are that each player's payoff displays increasing differences in own action and the profile of types and that each player's interim beliefs are increasing in type with respect to first-order stochastic dominance (e.g., types are affiliated). The result holds for general action and type spaces (single-, multi-, or infinite-dimensional; continuous or discrete) and no prior is assumed. We also provide the following comparative statics result: the greatest and least equilibria are higher if there is a first-order stochastic dominant shift in the interim beliefs. We apply this result to strategic information revelation in games of voluntary disclosure.     

Fiscal policy under loose commitment

Due to time-inconsistency or political turnover, policymakers' promises are not always fulfilled. We analyze an optimal fiscal policy problem where the plans made by the benevolent government are periodically revised. In this loose commitment setting, the properties of labor and capital income taxes are significantly different than under the full-commitment and no-commitment assumptions. Because of the occasional reoptimizations, the average capital income tax is positive even in the long-run. Also, the autocorrelation of taxes is lower, their volatility with respect to output increases and the correlation between capital income taxes and output changes sign. Our method can be used to analyze the plausibility and the importance of commitment in a wide-class of dynamic problems.     

Do Bank Capital and Liquidity Affect Real Economic Activity in the Long Run? A VECM Analysis for the US

This paper analyses the long‐term economic costs of the new regulatory standards (the so‐called Basel III reform) for the US. Using a Vector Error Correction Model that estimates long‐run relationships among a small set of macro‐variables over the period 1994–2008, it shows that tighter capital and liquidity requirements have negative (but rather limited) effects on the level of long‐run steady‐state output and more sizeable effects on banks’ return on equity. The economic costs are considerably below the estimated positive benefit that the reform should have by reducing the probability of banking crises and the associated banking losses ( BCBS, 2010b ).     

Prior symmetry, similarity-based reasoning, and endogenous categorization

This paper presents a rational theory of categorization and similarity-based reasoning. I study a model of sequential learning in which the decision maker infers unknown properties of an object from information about other objects. The decision maker may use the following heuristics: divide objects into categories with similar properties and predict that a member of a category has a property if some other member of this category has this property. The environment is symmetric: the decision maker has no reason to believe that the objects and properties are a priori different. In symmetric environments, categorization is an optimal solution to an inductive inference problem. Any optimal solution looks as if the decision maker categorizes. Various experimental observations about similarity-based reasoning coincide with the optimal behavior in my model.     

Core tâtonnement

Two discrete time tâtonnement processes—one featuring successive tâtonnement, the other featuring simultaneous tâtonnement—for the core of coalitional games with transferable utility are introduced. For totally balanced games, the successive core tâtonnement process corresponds to the standard simultaneous price tâtonnement process of competitive equilibrium theory via the Shapley-Shubik (market game-direct market) correspondence. The simultaneous core tâtonnement process is based entirely on the intuition behind the definition of the core for games with transferable utility, and it does not correspond to any evident competitive equilibrium tâtonnement process. Both processes are proven to be globally stable. The two processes offer easily implementable algorithms for approximately computing core points.     

Optimal management of an ecosystem with an unknown threshold

We consider an ecosystem with two distinct equations of motion that are separated by a threshold value of the state variable. We find that increasing uncertainty (both uncertainty embedded in the natural system and uncertainty of the decisionmaker about the location of the threshold) can lead to nonmonotonic changes in precaution: a reduction in uncertainty can first increase and then decrease optimal precautionary activity. This nonmonotonicity can help to explain why regulators often give conflicting arguments about optimal abatement policies in the face of uncertainty. For example, some regulators argue for an immediate reduction in pollutant loading until uncertainty about the underlying process is reduced while others call for no costly reductions in pollutant loading until the same uncertainty is reduced. These statements can be consistent even if both sides agree on both economic objectives and the system dynamics, but have different priors on the uncertainty involved.     

Renewable resource management with environmental prediction: the importance of structural specification

Environmental variability can substantially influence renewable resource growth, and as the ability to forecast environmental conditions improves, opportunities for adaptive management emerge. Using a stochastic stock‐recruitment model, Costello, et al. ( 2001 ) show the optimal management response to a prediction of favourable growth conditions is to reduce current harvests. We find this result may be reversed when environmental variability and stock are substitutes in growth, a possibility that has been ignored by resource economists. As an example, we analyze the South Carolina white shrimp fishery, finding the optimal response to a prediction of favourable overwinter conditions is to increase fall harvests.     

Tangency capacity notions based upon the profit and cost functions: A non-parametric approach and a general comparison

This contribution provides a way to define and compute a tangency notion of economic capacity based upon the relation between the various directional distance functions and the profit and cost functions using non-parametric technologies. A new result relating profit and cost function-based tangency capacity notions is established.     

ALLOCATION UNDER INCREASING AND DECREASING RETURNS

Abstract.  Efficient Allocation of labour among a set of machines (say) operating under initially increasing and then decreasing returns is studied first for identical machines and then for the case when machines can be ranked by their productivity. Essentially it is a question of the number of machines to be operated. At critical input levels this number jumps and the intensity of machine use is reduced discontinuously.     

Dynamic variational preferences

We introduce and axiomatize dynamic variational preferences, the dynamic version of the variational preferences we axiomatized in [F. Maccheroni, M. Marinacci, A. Rustichini, Ambiguity aversion, robustness, and the variational representation of preferences, Mimeo, 2004], which generalize the multiple priors preferences of Gilboa and Schmeidler [Maxmin expected utility with a non-unique prior, J. Math. Econ. 18 (1989) 141-153], and include the Multiplier Preferences inspired by robust control and first used in macroeconomics by Hansen and Sargent (see [L.P. Hansen, T.J. Sargent, Robust control and model uncertainty, Amer. Econ. Rev. 91 (2001) 60-66]), as well as the classic Mean Variance Preferences of Markovitz and Tobin. We provide a condition that makes dynamic variational preferences time consistent, and their representation recursive. This gives them the analytical tractability needed in macroeconomic and financial applications. A corollary of our results is that Multiplier Preferences are time consistent, but Mean Variance Preferences are not.