Eliciting beliefs: Proper scoring rules,incentives, stakes and hedging

Proper Scoring Rules (PSRs) are popular incentivized mechanisms to elicit an agent's beliefs. This paper combines theory and experiment to characterize how PSRs bias reported beliefs when (i) the PSR payments are increased, (ii) the agent has a financial stake in the event she is predicting, and (iii) the agent can hedge her prediction by taking an additional action. In contrast with previous literature, the PSR biases are characterized for all PSRs and all risk averse agents. Our results reveal complex distortions of reported beliefs, thereby raising concerns about the ability of PSRs to recover truthful beliefs in general decision-making environments.     

Gains from manipulating social choice rules

Gibbard–Satterthwaite analysis is extended by examining the size of the potential gains that can be achieved from manipulation. The authors are grateful for an invitation from the University of Athens to visit their Ph D program where some of this work was done.     

Interest rate rules, inflation and the Taylor principle: an analytical exploration

Summary. The purpose of this article is to characterize optimal interest rate rules in the framework of a dynamic stochastic general equilibrium model, and notably to scrutinize the “Taylor principle”, according to which the nominal interest rate should respond more than one for one to inflation. This model yields explicit solutions for the optimal rule. We find that the elasticity of response depends on numerous factors, such as the degree of price rigidity, the autocorrelation of the underlying shocks, or which measure of inflation is used. In general the optimal elasticity of the interest rate with respect to inflation needs not be greater than one.Received: 6 November 2003, Revised: 17 August 2004 JEL Classification Numbers: E5, E52, E58.J.-P. Bénassy: I wish to thank Daniel Laskar and an anonymous referee for their perceptive comments on earlier drafts of this paper. Of course all remaining deficiencies are mine.     

Legislators' behaviour and electoral rules: Evidence from an Italian reform

We explore how electoral rules and the degree of civicness of the voters interact in shaping elected officials' behaviour. We examine the expenditure proposals sponsored by Italian Senators from 1994 to 2013 and exploit the 2005 electoral reform that transformed a mainly majoritarian system into a mainly proportional one. First, we find that legislators elected in first-past-the-post districts are more likely to sponsor pork-barrel bills and to put effort into legislative activity than those elected with a closed-list proportional system. Second, more importantly, we show that the effects of the electoral rules are muted in areas with high civicness.     

Augmented serial rules for an excludable public good

Summary. We present a new class of rules named augmented serial rules for the provision of an excludable public good. First, we characterize this class by the four axioms of strategy-proofness, envy-freeness, access independence, and nonbossiness. Second, we identify two important subclasses by imposing an additional axiom: (i) anonymous augmented serial rules by anonymity, and (ii) Moulins serial rule by individual rationality.Received: 31 December 2002, Revised: 9 June 2004, JEL Classification Numbers: D71, D82, H41.This paper is a substantial revision of Serial cost sharing with simple games. I would like to thank Hervé Moulin, Yoshikatsu Tatamitani, an associate editor, and three anonymous referees for helpful suggestions and detailed comments. This research was partially supported by the Ministry of Education, Culture, Sports, Science, and Technology in Japan (Grant-in-Aid for 21st Century COE Program Microstructure and Mechanism Design in Financial Markets).     

Monetary policy rules with PID control features: evidence from the UK,USA and EU

ABSTRACT

This paper considers the extent to which the monetary policy operations of three major central banks can be regarded as an application of Proportional-Integral-Derivative (PID) control rules. The paper outlines the general PID framework and estimates a series of dynamic models to identify how interest rate policy adjustments are affected by the rate of inflation and the level of macroeconomic activity. The paper examines data for the UK, the USA and the Eurozone. The results suggest that the PID rules can provide a useful theoretical and empirical framework for estimating central bank responses to the inflation and macroeconomic activity variables by improving the explanatory power of the Taylor rule model and determining the effect of the parameters.     

Counting combinatorial choice rules

I count the number of combinatorial choice rules that satisfy certain properties: Kelso–Crawford substitutability, and independence of irrelevant alternatives. The results are important for two-sided matching theory, where agents are modeled by combinatorial choice rules with these properties. The rules are a small, and asymptotically vanishing, fraction of all choice rules. But they are still exponentially more than the preference relations over individual agents—which has positive implications for the Gale–Shapley algorithm of matching theory.     

The Costs of Implementing the Majority Principle: The Golden Voting Rule

In a context of constitutional choice of a voting rule, this paper presents an economic analysis of scoring rules that identifies the golden voting rule under the impartial culture assumption. This golden rule depends on the weights β and (1−β) assigned to two types of costs: the cost of majority decisiveness (‘tyranny’) and the cost of the ‘erosion’ in the majority principle. Our first main result establishes that in voting contexts where the number of voters n is typically considerably larger than the number of candidates k, the golden voting rule is the inverse plurality rule for almost any positive β. Irrespective of n and k, the golden voting rule is the inverse plurality rule if β ≥ 1/2 .. This hitherto almost unnoticed rule outperforms any other scoring rule in eliminating majority decisiveness. The golden voting rule is, however, the plurality rule, the most widely used voting rule that does not allow even the slightest ‘erosion’ in the majority principle, when β=0. Our second main result establishes that for sufficiently “small size” voting bodies, the set of potential golden rules consists at most of just three rules: the plurality rule, the Borda rule and the inverse plurality rule. On the one hand, this finding provides a new rationalization to the central role the former two rules play in practice and in the voting theory literature. On the other hand, it provides further support to the inverse plurality rule; not only that it is the golden rule in voting contexts, it also belongs, together with the plurality rule and the Borda method of counts, to the “exclusive” set of potential golden voting rules in small committees. We are indebted to Jim Buchanan, Amichai Glazer, Noa Nitzan, Ken Shepsle, and an anonymous referee for their useful comments.     

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.     

China’s monetary policy: Quantity versus price rules

Two monetary policy rules, the money supply (quantity) rule and interest rate (price) rule, are explored for China in a dynamic stochastic general equilibrium model. The empirical results seem to indicate that the price rule is likely to be more effective in managing the macroeconomy than the quantity rule, favoring the government’s intention of liberalizing interest rates and making a more active use of the price instrument. Moreover, the economy would have experienced less fluctuations had interest rate responded more aggressively to inflation.     

Choice under complete uncertainty: axiomatic characterizations of some decision rules

Summary. We provide characterizations of four new rules for individual decision-making under complete uncertainty. They are what we call the min-max rule, the max-min rule, the lexicographic min-max rule and the lexicographic max-min rule. These rules provide orderings of the sets of possible outcomes associated with uncertain prospects. They provide significant alternatives to commonly-used rules that focus on worst outcomes or best outcomes only, and lexicographic versions of those rules. Received: August 20, 1998; revised version: November 3, 1999     

How quorum rules distort referendum outcomes: Evidence from a pivotal voter model

In many jurisdictions, whether referendum results are binding depends on legally defined quorum requirements. We use a pivotal voter model to examine the consequences of such requirements. We find that, although quorum rules differ in consequences, a status quo bias that is usually attributed need not be present and that quorum rules may work against the status quo. The rules can also both favor minorities and reduce voter turnout. Because quorum rules can create situations in which the secrecy of the vote is compromised, the door is opened to undemocratic forms of social and political pressure.     

Macrodynamics of debt-financed investment-led growth with interest rate rules

This article demonstrates the diverse dynamic possibilities arising out of a simple macroeconomic model of debt-financed investment-led growth in the presence of interest rate rules. We show possibilities of convergence to steady state, and growth cycles around it as well as various complex dynamics. We investigate whether, given this framework, the financial sector can provide endogenous bounds to an otherwise unstable system. The effectiveness of monetary policy in the form of an interest rate rule targeting capacity utilization is examined under this context.     

Policy mix and debt sustainability: evidence from fiscal policy rules

This paper characterizes rules-based fiscal policy setting for G-3 and large EMS countries. We set up a simple fiscal policy rule and then infer on the policymakers’ reaction coefficients by testing with GMM. Our results qualify existing evidence on systematic fiscal policy in two respects. First, fiscal policy usually stabilizes public debt; and there is indeed substantial interaction between fiscal and monetary policies via the policy mix or the debt channel. Second, sustainability is achieved with a “stop–go” cycle of consolidation. Unless debt ratios are high, consolidation does not come at the cost of less cyclical stabilization.     

Stabilizing Taylor rules and determinacy under unit root supply shocks: A re-examination

I revisit the stabilizing and determinacy properties of Taylor-type policy rules in the canonical New Keynesian model when allowing for a unit root in the supply shock process. While able to offset inflationary pressure from non-stationary disturbances, interest-rate feedback rules that are unresponsive to fluctuations in the output gap necessarily produce unstable dynamics and explosive volatility for the latter. Specifically, rules fulfilling the Taylor principle are found to enforce the unique (non-stationary) equilibrium featuring well-anchored inflation expectations and immunity to sunspots; yet there exists no equilibrium predicting stationary behavior for both the inflation and output gap series, irrespective of whether the policy stance induces determinacy or indeterminacy. I show this property survives the adoption of forecast-based instrument rules, and also explore the relationship between Taylor-type rules and optimal discretionary policies in this particular New Keynesian environment.     

Minimum participation rules in international environmental agreements: empirical evidence from a survey among delegates in international climate negotiations

Recent contributions to the theoretical and experimental literature suggest that minimum participation rules (MPRs) are able to reduce free-riding incentives and may facilitate cooperation (or at least coordination) at the extensive margin of international environmental agreements. Based on a data set from a worldwide survey among delegates in international climate negotiations, this article assesses preferences for different MPRs for a future climate treaty among key players. The empirical findings provide evidence that small countries with low bargaining power rather opt for large minimum membership requirements while industrialized countries push forward the idea of a small carbon club of the largest emitters only. In contrast, delegates from countries in transition try to keep emission thresholds rather low which would allow a future agreement to come into force without their signature.     

The exchange rate and optimal monetary policy rules in open and developing economies: Some simple analytics

Using a simple, tractable model, this paper revisits and expands upon issues relating to optimal monetary policy rules (MPRs) in open economies. The optimality of the rule is explored through various specifications of a central bank loss function as it is the loss function that offers insight into central bank preferences. Many of the issues on this topic have centred on the role of the exchange rate: Is it optimal for the policy instrument to react to the exchange rate? What is the role of the exchange rate in a domestic inflation targeting vs CPI inflation targeting? Does a fear of floating have any bearing on the way optimal MPRs are constructed? While this paper is not empirical, the analysis is relevant for central banks in open and developing economies that face a choice between allowing exchange rates to float (and adopting an inflation targeting regime) and engaging in some degree of exchange rate fixity.     

The effects of welfare vehicle asset rules on vehicle assets

Before 1996, households were typically ineligible for welfare if they had assets worth more than $1000, where $1500 from each vehicle's value was excluded from this determination. However, the 1996 welfare reform act began allowing states to increase their asset limits and vehicle exclusions. This may prompt low-income households to reallocate resources to or from vehicles. We examine the effects of state vehicle asset rules on vehicle assets. Results show that liberalizing asset rules increases vehicle assets and that this increase is driven largely by eligible individuals increasing vehicle assets, with no evidence indicating that ineligible individuals reduce vehicle assets to become eligible.     

Education and happiness: an alternative hypothesis

Recent research has documented a negative relationship between education and happiness. We test the hypothesis that the extent to which education makes an individual happy depends on their current age in life. We find suggestive evidence that people with higher education are more likely to be happier, on average, than their less educated counterparts starting in their early to mid-30s.     

Monetary policy rules and directions of causality: A test for the euro area

Abstract

Using a VAR model in first differences with quarterly data for the euro zone, the study aims to ascertain whether decisions on monetary policy can be interpreted in terms of a “monetary policy rule” with specific reference to the so-called nominal GDP targeting rule (Hall and Mankiw, 1994 Granger, C.W.J. “Investigating Causal Relations by Econometric Models and Cross-Spectral Methods.” Econometrica, 1969, 37 (3), 424–438.[Crossref], [Web of Science ®] , [Google Scholar]; McCallum, 1988 McCallum, B. “Nominal GDP Targeting”, Shadow Open Market Committee, October 21, 2011. [Google Scholar]; Woodford, 2012 Taylor, J.B., Williams, J.C. “Simple and Robust Rules for Monetary Policy”, NBER Working Paper No. 15908, April, 2010. [Google Scholar]). The results obtained indicate a causal relation proceeding from deviation between the growth rates of nominal gross domestic product (GDP) and target GDP to variation in the three-month market interest rate. The same analyses do not, however, appear to confirm the existence of a significant inverse causal relation from variation in the market interest rate to deviation between the nominal and target GDP growth rates. Similar results were obtained on replacing the market interest rate with the European Central Bank refinancing interest rate. This confirmation of only one of the two directions of causality does not support an interpretation of monetary policy based on the nominal GDP targeting rule and gives rise to doubt in more general terms as to the applicability of the Taylor rule and all the conventional rules of monetary policy to the case in question. The results appear instead to be more in line with other possible approaches, such as those based on post Keynesian analyses of monetary theory and policy and more specifically the so-called solvency rule (Brancaccio and Fontana, 2013 ———. Macroeconomics, 2nd ed., Pearson Education Company, ch. 30. [Google Scholar], 2015 Brancaccio, E. The Central Banker as “Regulator” of Conflict. In G. Fontana and M. Setterfield (eds.), Macroeconomic Theory and Macroeconomic Pedagogy. Basingstoke: Palgrave Macmillan, 2009, 295–308.[Crossref] , [Google Scholar]). These lines of research challenge the simplistic argument that the scope of monetary policy consists in the stabilization of inflation, real GDP, or nominal income around a “natural equilibrium” level. Rather, they suggest that central banks actually follow a more complex purpose, which is the political regulation of the financial system with particular reference to the relations between creditors and debtors and the related solvency of economic units.