Identification and estimation of endogenous selection models in the presence of misclassification errors

This paper shows the semi-parametric identification and estimation of sample selection models when the primary equation contains a discrete mismeasured endogenous covariate. Assuming that appropriate instruments for the presence of endogeneity are available, I apply a control function approach to remove the possible endogeneity. Based on the conditional mean independence between the model error and the selection error, the model can be regarded as a semi-parametric regression model with a discrete mismeasured covariate, thereby permitting a non-classical measurement error. Additional identification assumptions include monotonicity restrictions on the regression function and an empirical testable rank condition. I then use the identification result to construct a sieve maximum likelihood estimation estimator to estimate the model parameters consistently and recover the selection rule and joint probabilities of the accurately measured endogenous variable and the mismeasured observed variable. The proposed estimation method allows for a rather flexible functional form of the mismeasured endogenous covariate, requires only one valid instrument to control for both endogeneity and measurement errors for the variable of interest, and imposes no distribution assumptions on the selection rule.     

Devaluation of fixed exchange rates: optimal strategy in the presence of speculation

Summary. This paper analyzes devaluations in a fixed exchange rate system by endogenizing both the speculation and devaluation decisions. It is shown that deterministic devaluation rules are generally sub-optimal for the central bank. In order to deter speculation the central bank introduces uncertainty into the timing of devaluation. The nature this mixed strategy is derived, as is the optimal strategy for speculators. The analysis allows an explanation of successful devaluations that are not precipitated by a speculative attacks, even under perfect capital mobility. Received: May 17, 1999; revised version: June 2, 1999     

Lie aversion and self-reporting in optimal law enforcement

Requirements that individuals or companies self-report violations are common in regulation and law enforcement. This paper studies how violators’ aversion to lying affects the design and merit of enforcement regimes that require self-reporting. Even when a self-reporting requirement produces costs of lies and enjoys no economic advantage in the absence of lie aversion, I find that self-reporting improves enforcement efficiency. With lie aversion, self-reporting enables greater deterrence of violations at a lower cost of monitoring. Corollaries to this result are that (1) the presence of lie aversion enhances social welfare; (2) enforcement regimes that elicit more noxious lies when false reports are made—for example, a compulsory versus voluntary self-reporting feature—are advantageous; and (3) under an optimal enforcement regime, lying generally occurs and the self-reporting sanction is higher than the average sanction for a false report.     

Bounding the inefficiency of equilibria in nonatomic congestion games

Equilibria in noncooperative games are typically inefficient, as illustrated by the Prisoner's Dilemma. In this paper, we quantify this inefficiency by comparing the payoffs of equilibria to the payoffs of a “best possible” outcome. We study a nonatomic version of the congestion games defined by Rosenthal [Int. J. Game Theory 2 (1973) 65], and identify games in which equilibria are approximately optimal in the sense that no other outcome achieves a significantly larger total payoff to the players—games in which optimization by individuals approximately optimizes the social good, in spite of the lack of coordination between players. Our results extend previous work on traffic routing games.     

Revenue-maximizing tax rates in personal income taxation in the presence of consumption taxes: a note

This article computes revenue-maximizing tax rates in personal income taxes in the presence of consumption taxes. It finds that the traditional Laffer analysis, which neglects the effects of marginal tax rates on consumption, overestimates the magnitude of revenue-maximizing tax rates. The bias caused by this oversight is computed.     

Inflation and interest rates in the presence of a cost channel,wealth effect and agent heterogeneity

As far as the control of inflation is concerned, the interest rate is the most important monetary instrument. This paper examines the effectiveness of the interest rate policy in controlling inflation. The model utilized in this paper considers both demand and supply side effects of interest rate policy. These effects are used to derive not only the relevant impulse response functions but also the welfare loss to the society that arises from the supply side shocks. Based on their ability to control inflation and minimization of the overall welfare loss to the society, three policies are compared: (i) monetary policy with commitment, (ii) Taylor's rule, and (iii) inflation targeting. We argue that, in the presence of a cost channel, it is imperative that the interest rate policy is used with restraint. Our results also suggest that ignoring the cost channel of monetary policy can lead to significant under-estimation of the social welfare loss.     

Bounding the benefits of stochastic auditing: The case of risk-neutral agents

Summary. In the context of a costly-state-verification model with a risk-neutral agent having limited liability, it has been postulated that allowing stochastic auditing reduces the asymmetric information problem to a trivial one: i.e., the first best can be approached arbitrarily closely with feasible contracts. This paper proves the postulate to be false: the surplus from feasible contracts is bounded strictly below the first-best surplus level. The bound is straightforward to compute in examples. The paper thus removes a justification for the restriction to deterministic auditing commonly made in the literature. Received: July 18, 1997; revised version: February 23, 1998     

Ownership relations in the presence of cross-shareholding

The direct ownership structure in a sector can be readily obtained from data on shareholding. Due to cross-shareholding, however, the true ownership structure may be hidden by a complex network of indirect relations. In studying the property structure, two important aspects are the size of the relations between primary owners (e.g. individuals) and secondary owners (e.g. companies), and the distance between them. The distance is obtained from the average number of secondary owners via whom the relation runs. As an empirical application, we study the banking sector in the Czech Republic, where also the relation between distance and separation of dividend and control rights is discussed.      

Tax policy in the presence of emigration

This paper investigates the relationship between utilitarianism and horizontal equity in models of income taxation in particular and self-selection in general. An example involving well-behaved individual preferences is constructed in which a maximization of a utilitarian social welfare function leads via income taxation to horizontal inequities. Sufficient conditions for utilitarianism to bring horizontal equity are derived. The results are applied to the question of whether income tax credits are an appropriate way to treat differences in family size.     

Endogenous timing in the presence of non-monotonicities

The aim of this paper is to generalize the endogenous timing game proposed by Hamilton and Slutsky (Games and Economic Behavior, 1990, 2, pp. 29–46) by allowing the payoff or the marginal payoff of a player to become non-monotonic with respect to the strategy of the opponent. We propose a taxonomy of the subgame-perfect Nash equilibria based on the characteristics of the payoff functions proposed by Eaton (Canadian Journal of Economics, 2004, 37, pp. 805–29). We determine under which conditions of the initial payoff functions commitment has a social value and when the simultaneous-move Nash equilibrium is commitment robust and discuss its Pareto efficiency.     

Autocorrelated errors in simple disequilibrium models

The simple disequilibrium model is extended to the case in which the errors follow a first-order Markov process. This differs from the contribution of Laffont and Monfort in that sample partition is not assumed to be known. The likelihood function is derived and maximum likelihood estimates are obtained for the Rosen-Quandt model of an aggregate labor market.     

Optimum taxation with errors in administration

The paper compares the welfare levels which can be achieved by two distinct tax regimes: lump-sum taxation, where one attempts to identify individuals and allocate transfers or subsidies on the basis of characteristics, and income taxation, where characteristics are not observed but personal incomes are measured and taxed. Where there are no errors in classifying individuals, lump-sum taxation is superior, but, where mistakes are made in the allocation of lump-sum grants or subsidies, income taxation may be more attractive. The level of errors where the regimes are equally desirable in terms of social welfare is computed in simple models following that of Feldstein (1973). Where there is strong aversion to inequality, then income taxation becomes preferable at quite small errors.In analysing income taxation it is shown that in the Feldstein model with endogenous wages the marginal tax rate (in optimum income taxation) on the more skilled is negative and that on the less skilled is positive in contrast to the standard results [see Seade (1977)] with exogenous wages.     

Explaining the standard errors of corruption perception indices

This paper examines the standard errors of two popular indices of corruption perceptions: the Worldwide Governance Indicators’ Control of Corruption (WGI-CC) and Transparency International's Corruption Perception Index (TI-CPI). The standard errors of these indexes stem from the degree of variation across the sources upon which these two aggregate indices are based. In general, standard errors are not associated with country characteristics; this supports the common assumption that differences across surveys are random. There are two exceptions, however. They involve the degree of media freedom in a country and the country's past corruption scores, possibly indicating the use of cognitive heuristics by the assessors who do the ratings. No evidence exists that more diverse countries have greater variation across corruption scores. In comparing the two aggregate measures, we find that the standard errors for TI-CPI are associated with country characteristics in fewer cases than are those for WGI-CC. Finally, our findings raise concerns about the applicability of the WGI-CC's use of the unobserved components model for extracting signals from noise.     

Fairness, errors and the power of competition

In this paper, we investigate the effects of competition on bargained outcomes. We show that the neglect of either fairness concerns or decision errors will prevent a satisfactory understanding of how competition affects bargaining. We conducted experiments which demonstrate that introducing a small amount of competition to a bilateral ultimatum game – by adding just one competitor – induces large behavioral changes among responders and proposers, causing large changes in accepted offers. Models that assume that all people are self-interested and fully rational do not adequately explain these changes. We show that a model which combines heterogeneous fairness concerns with decision errors correctly predicts the comparative static effects of changes in competition. Moreover, the combined model is remarkably good at predicting the entire distribution of offers in many different competitive situations.