Asymptotic distribution of the sup-Wald statistic under specification errors

Consider a simple structural break model where y_t=α₁+β₁f(x_t)+u_t for t≤k₀ and y_t=α₂+β₂f(x_t)+u_t for t>k₀. The timing of break and the structural parameters are unknown. Suppose the true functional form of the regressor f(·) is misspecified as g(·). We do not place too many restrictions on the functional forms of f(·) and g(·). A frequently encountered example in economics is that the true model is measured in level, but we estimate a log-linear model, i.e. when f(x_t)=x_t and g(x_t)=log(x_t) For any f(·) and g(·), we derive a nonstandard limiting null distribution of the sup-Wald test statistic under some very general regularity conditions. Monte Carlo simulations support our findings.     

Min, Max, and Sum

This paper provides characterization theorems for preferences that can be represented by U(x₁, …, x_n)=min{x_k}, U(x₁, …, x_n)=max{x_k}, U(x₁, …, x_n)=∑ u(x_k), or combinations of these functionals. The main assumption is partial separability, where changing a common component of two vectors does not reverse strict preferences, but may turn strict preferences into indifference. We discuss applications of our results to social choice. Journal of Economic Literature Classification Numbers: C0, D1, D6.     

One-sided bargaining over a finite set of alternatives

I consider a bargaining game in which only one player can make proposals and the space of proposals is finite. Thus, the game is like a situation where: (i) a CEO suggests a possible hire, who must be okayed by a board of directors, or (ii) the US president nominates a potential judge, who must be okayed by the Senate. My main result is an algorithm that finds the unique subgame-perfect equilibrium. The number of steps in the algorithm is on the order of $n$, the number of possibilities (e.g., applicants to a job) that the bargainers may consider. By contrast, if one uses backwards induction to solve the game, then the number of steps is on the order of $n!$. A corollary of the main result, similar to some results of previous bargaining models, is that the wait costs of only one player, the non-proposer, is relevant to the outcome. The wait costs of the proposer are irrelevant, provided that they are positive. Applied to the nomination process specified by the US Constitution, the corollary suggests that only the Senate's wait costs are relevant to the outcome—the president's wait costs are irrelevant. As I argue, this result may explain a little-noticed regularity of American politics. This is that the Senate seems to have much influence in the selection of lower-court judges but relatively little influence in the selection of Supreme Court justices.     

Multivariate time series models for Austrian interest rates

Zusammenfassung Fünf monatliche österreichische Zinszeitreihen, die Habenzinsen, die Sollzinsen sowie die Zinssätze für Dreimonatsgelder, der täglich fälligen Gelder und der Anleihen (i. w. S.) werden für den Zeitraum 1972 bis 1980 mit Hilfe multivariater (oder vektor-)autoregressiver (AR) Prozesse untersucht.Nachdem die Zeitreihen mittels der Methode vonKitagawa-Akaike (1982) auf Ausreißer geprüft und korrigiert wurden, zeigt sich, daß die korrigierte Zeitreihe der Sollzinsen bessere Prognoseeigenschaften erzielt. Obwohl die Stationaritätsvoraussetzungen für alle Zeitreihen etwas problematisch sind, bringen auch einfache Transformationen wie Differenzenbildung keine Hilfe bezüglich Stationarität. Die Schätzung eines simultanen fünfdimensionalen AR-Prozesses allerZinsreihen ergibt, daß ein Aufbrechen dieses Systems in zwei Blöcke das beste Resultat im Sinne des InformationskriteriumsAIC ergibt. Der erste Block wird durch die Habenzinsen und die (korrigierten) Sollzinsen gebildet, die eine wechselseitige Dynamik bis zum Lag 2 aufweisen. Der zweite Block wird durch die Zinssätze für Dreimonatsgelder, täglich fällige Gelder und Anleihen gebildet. Als Nebenprodukt dieser multivariaten Zeitreihenanalyse können temporale Kausalitäts- (oder Feedback-)maße berechnet werden. Es wird jedoch gezeigt, daß das Zusammenwirken von bestimmten Schätzprozeduren mit dem InformationskriteriumAIC die Schätzung dieser Kausalitätsmaße nicht immer ermöglicht. Allgemein läßt sich sagen, daß die instantane Kausalität in den Modellen dominiert, was teilweise durch nichtstationäre Einflüsse und Ausreißer erklärt werden kann.     

On incentive structures of a socialist economy

This paper considers an incentive structure B_T as an alternative to the incentive structure B_D recently suggested by Domar. Both of these incentive structures induce managers in a planned economy to provide the socially desirable output level while allowing them to set prices. In two aspects B_T is better than B_D. First, B_D works only if demand is elastic at the optimal output level while B_T works whether demand is elastic or inelastic at that level. Second, even when demand is elastic at the optimal level, there are circumstances for which output converges to the optimal level faster under B_T than under B_D.     

On relationships between numerical representations of interval orders and semiorders

The extent to which continuous numerical representations of interval orders are unique is considered. Apair of continuous, real-valued functions, <u, v>, represents an interval order, <X, >>, provided that for x, y ϵ X, x > y if and only if u(x) > v(y). Relationships which necessarily hold between any two such numerical representations are presented and a method by which one continuous representation can be derived from another is described. Similar considerations are made for special forms of continuous numerical representations of semiorders.     

How large is liquidity risk in an automated auction market?

We introduce a new empirical methodology that models liquidity risk over short time periods for impatient traders who submit market orders. Using Value-at-Risk type measures, we quantify the liquidity risk premia for portfolios and individual stocks traded on the automated auction market Xetra. The specificity of our approach relies on the adequate econometric modelling of the potential price impact incurred by the liquidation of a portfolio. We study the sensitivity of liquidity risk towards portfolio size and traders' time horizon, and interpret its diurnal variation in the light of market microstructure theory.

---

The political business cycle: An extension of Nordhaus's model

Summary Nordhaus's (1975) model of the political business cycle is extended in this paper by explicitly formulating the link between the economic sphere (represented by the Phillips curve) and fiscal policy. This extended model yields the hypothesis that during an electoral period the budgetary policy is contractionary in the first half and expansionary in the second half with the consequences of a reduction in unemployment (increase in inflation) before elections and a rise in unemployment (decrease in inflation) after elections. This hypothesis is tested against the data of the Austrian economy by a non-parametric test (which leads to a rejection of our hypothesis for Austria). The extent of the political business cycle bias is demonstrated by policy simulations within a macroeconomic model.

---

Zusammenfassung Das Modell vonNordhaus (1975) über den Politischen Konjunkturzyklus wird in diesem Artikel erweitert, indem explizit die Beziehung zwischen dem ökonomischen Bereich (repräsentiert durch die Phillips-Kurve) und der Fiskalpolitik hergestellt wird. Dieses erweiterte Modell führt zu der Hypothese, daß während einer Legislaturperiode die Budgetpolitik in der ersten Hälfte restriktiv und in der zweiten Hälfte expansiv ist. Als Konsequenz dieser Politik kommt es zu einer Verringerung der Arbeitslosigkeit (einem Anstieg der Inflation) vor Wahlen und einem Anstieg der Arbeitslosigkeit (einer Verringerung der Inflation) nach den Wahlen. Diese Hypothese wird an Hand österreichischer Daten mit Hilfe eines nichtparametrischen Tests geprüft (was zu einer Ablehnung unserer Hypothese für Österreich führt). Das quantitative Ausmaß des durch den Politischen Konjunkturzyklus entstehenden bias wird dann mit Hilfe von politischen Simulationen im Rahmen eines makroökonomischen Modells demonstriert.

---

Definitions AK Public purchases of goods and services + public investment (A.S.) - AT Unemployed persons, in total (in 1.000) - AZA Worked hours per worker (in hours) - BAU Central government's expenditures (outlays) in total (A.S.) - BEI Central government's revenues (receipts) in total (A.S.) - BS Budget deficit of the Central government (A.S.) - CB Labour supply (in 1.000) - CH Unemployment rate (%) - CON Public consumption (A.S.) - COR Public consumption (A.S. 1964) - CPN Private consumption (A.S.) - CPR Private consumption (A.S. 1964) - CUB Current balance (A.S.) - DS Direct taxes + public income from property-transfers to households + transfers from households (A.S.) - DX DS-public income from property (A.S.) - D7273 Dummy for monetary policy and Dummy for change from gross turnover tax to VAT (1972+1; 1973–1; other 0) - D7278 Dummy for investment tax (1972+1; 1973–1; 1977+1; 1978–1; other 0) - D73US Dummy for shift of employers to employees (1973+1; other 0) - D7375 Dummy for incomes tax reform (1973–1; 1975–1; other 0) - D7778 Dummy for extra VAT (1977+1; 1978–1; other 0) - EBE Population in total (in 1.000) - EET Employment in total + unemployed (total labour supply; in 1.000) - ESE Employers (in 1.000) - EUS Employees (in 1.000) - FBN Monetary base (A.S.) - FGN Money M1 (A.S.) - FG Money M1 (A.S. 1964) - GDN Gross domestic product (A.S.) - GDR Gross domestic product (A.S. 1964) - GER Energy (1.000 t/TCE) - GIR Industry output (A.S. 1964) - GE Profits in total (A.S.) - GV Profits in total (A.S. 1964) - IS Indirect taxes—transfers to firms (A.S.) - ITN Gross fixed investment (A.S.) - ITR Gross fixed investment (A.S. 1964) - JR Final domestic demand (A.S. 1964) - LA Stocks and statistical discrepancies; National account basis (A.S.) - LEAD Difference of one major party over the other in parliament in percentage points - LB Foreign balance (A.S.) - LKV Long term capital transactions (A.S.) - MA Money M1 + profits (A.S. 1964) - MMN Imports of goods and services (A.S.) - MMR Imports of goods and services (A.S. 1964) - OIN Public investment (A.S.) - OKG Public purchases of goods and services (A.S.) - PC Private consumption deflator (1964=100) - PEN Energy prices (1964=100) - PI Gross fixed investment deflator (1964=100) - PK Imports of goods and services deflator (1964=100) - PL Exports of goods and services deflator (1964=100) - PT Gross domestic product deflator (1964=100) - RES Value change in balance of payments reserves (A.S.) - RIR Interest rate for long term bonds (%) - SD Stocks and statistical discrepancies; National account basis (A.S. 1964) - ST Overall indirect taxes—subsidies; National account basis (A.S.) - STD Direct taxes (A.S.) - STI Indirect taxes (A.S.) - TAH Transfers to households (A.S.) - TBB Trade balance (A.S.) - TTT Time (1960, 1961,..., 1979) - TUN Transfers to firms (A.S.) - TVH Transfers from households (A.S.) - VW Gross fixed investment plus exports of goods and services (A.S. 1964) - WON Changes in foreign currency reserves of the National Bank (A.S.) - WKU Changes in foreign currency reserves of all commercial banks (A.S.) - WW Changes in balance of payments' official reserves (A.S.) - XB Relative energy prices (1964=100) - XXN Exports of goods and services (A.S.) - XXR Exports of goods and services (A.S. 1964) - YLN Wages and salaries (compensation of employees; A.S.) - YOB Public income from property (A.S.) - YVN Net disposable income (A.S.) - YY Net disposable income (A.S.) - YYN National income (A.S.) - ZST Statistical discrepancies in balance of payments (A.S.) - A.S billion Austrian Schilling at current prices - A.S. 1964 billion Austrian Schilling at constant prices (basis 1964)     

A new test for D-stability

A sufficient condition for D-stability of an n × n matrix A is the existence of a positive diagonal matrix P such that PA + A′P is negative definite. The search for P is replaced by solving a convex minimization problem.     

Transitive measurable utility

This paper continues a study of theories of preferences under risk that do not use the independence axiom of the von Neumann-Morgenstern theory. Unlike its predecessor, it assumes that preferences are transitive. The effects of transitivity are noted in two representations of preferences. The first, which also uses continuity and dominance axioms, involves a function u on a set P of probability measures for which u(p) > u(q) if and only if p is preferred to q. Although u might be nonlinear, it has other features of a von Neumann-Morgenstern linear utility function. The second representation has linear functions u and w on P, with w strictly positive except perhaps at preference-extreme measures—where it might vanish, such that u(p) w(q) > u(q) w(p) if and only if p is preferred to q. A symmetry axiom along with the axioms for the first representation are necessary and sufficient for the second representation.     

How useful is generalized Darwinism as a framework to study competition and industrial evolution?

The role of Darwinist concepts in evolutionary economics has long been a contentious issue. The controversy has recently been rekindled by the proposal of a “Universal” or “generalized” Darwinism, which holds that the ontology of all evolutionary systems accords to the Darwinist scheme of variation, selection and inheritance. This paper focuses on the application of the generalized Darwinist framework to the analysis of markets and industries. It argues that selection and inheritance concepts narrowly construed after the biological example are of limited usefulness. As an alternative to the ‘top–down’ approach of Universal Darwinism, the development of ‘bottom–up’ theories is advocated.

Adam Smith on lotteries: an interpretation and formal restatement

The paper concerns a neglected aspect of the Wealth of Nations (with the notable exception of D. Levy 1999 Levy, D. M. 1999. “Adam Smith’s Katallactic Model of Gambling: Approbation from the Spectator.” Journal of the History of Economic Thought 21 (1): 81–91. doi:10.1017/S1053837200002868.[Crossref] , [Google Scholar]), dealing directly with decision under risk. In a few pages from book I, chapter 10, Adam Smith explicitly named “lotteries” various objects of choice (possible occupations, or investment opportunities, for instance) and provided an analysis which standard expected utility glasses would hardly fit. Taking this into account allows a better understanding of the part played by typical characters like the “projector” or the “sober man”, in such matters as Smith’s conception of entrepreneurship or of the credit market. The use of some modern concepts in decision analysis (inverse stochastic dominance, rank dependent utility, prudence toward risk), is a means to show the existence, in Smith’s work, of an original theory from decision under risk, where his analysis of lotteries in the Wealth of Nations is consistent with statements from his moral philosophy on asymmetric sensitivity to gains and losses and to the regulating part played by the impartial spectator.     

Natural selection and rational decision: two concepts of optimization

There are two different kinds of optimization: “selection” and “rationality” optimization. Selection optimization characterizes competition in human and nonhuman societies sharing the same market or niche. “Rationality optimization”, on the other hand, characterizes human and nonhuman decision making processes. The two kinds of optimization generate the same result: agents end up behaving efficiently. Nonetheless, we should not downplay the differences between the two kinds of optimization. Otherwise, we would fail to capture the role of rationality in the development of the organism and possibly its implication for evolution.