Values for Markovian coalition processes

Time series of coalitions (so-called scenarios) are studied that describe processes of coalition formation where several players may enter or leave the current coalition at any point in (discrete) time and convergence to the grand coalition is not necessarily prescribed. Transitions from one coalition to the next are assumed to be random and to yield a Markov chain. Three examples of such processes (the Shapley-Weber process, the Metropolis process, and an example of a voting situation) and their properties are presented. A main contribution includes notions of value for such series, i.e., schemes for the evaluation of the expected contribution of a player to the coalition process relative to a given cooperative game. Particular processes permit to recover the classical Shapley value. This methodology??s power is illustrated with well-known examples from exchange economies due to Shafer (Econometrica 48:467?C476, 1980) and Scafuri and Yannelis (Econometrica 52:1365?C1368, 1984), where the classical Shapley value leads to counterintuitive allocations. The Markovian process value avoids these drawbacks and provides plausible results.     

Definitions of ambiguous events and the smooth ambiguity model

We examine a variety of preference-based definitions of ambiguous events in the context of the smooth ambiguity model. We first consider the definition proposed in Klibanoff et?al. (Econometrica 73(6):1849?C1892, 2005) based on the classic Ellsberg two-urn paradox (Ellsberg Q J Econ 75:643?C669, 1961) and show that it satisfies several desirable properties. We then compare this definition with those of Nehring (Math Soc Sci 38(2):197?C213, 1999), Epstein and Zhang (Econometrica 69:265?C306, 2001), Zhang (Econ Theory 20:159?C181, 2002), and Ghirardato and Marinacci (J Econ Theory 102:251?C289, 2002). Within the smooth ambiguity model, we show that Ghirardato and Marinacci (J Econ Theory 102:251?C289, 2002) would identify the same set of ambiguous and unambiguous events as our definition while Epstein and Zhang (Econometrica 69:265?C306, 2001) and Zhang (Econ Theory 20:159?C181, 2002) would yield a different classification. Moreover, we discuss and formally identify two key sources of the differences compared to Epstein and Zhang (Econometrica 69:265?C306, 2001) and Zhang (Econ Theory 20:159?C181, 2002). The more interesting source is that these two definitions can confound non-constant ambiguity attitude and the ambiguity of an event.     

Liquidity and the marginal value of information

We revisit Kyle’s (Econometrica 53:1315–1335, 1985) model of price formation in the presence of private information. We begin by using Back’s (Rev Financ Stud 5(3):387–409, 1992) approach, demonstrating that if standard assumptions are imposed, the model has a unique equilibrium solution and that the insider’s trading strategy has a martingale property. That in turn implies that the insider’s strategies are linear in total order flow. We also show that for arbitrary prior distributions, the insider’s trading strategy is uniquely determined by a Doob $h$ -transform that expresses the insider’s informational advantage. This allows us to reformulate the model so that Kyle’s liquidity parameter $\lambda $ is characterized by a Lagrange multiplier that is the marginal value or shadow price of information. Based on these findings, we can then interpret liquidity as the marginal value of information.     

Consistent strategy-proof assignment by hierarchical exchange

We characterize the family of efficient, consistent, and strategy-proof rules in house allocation problems. These rules follow an endowment inheritance and trade procedure as in Pápai’s hierarchical exchange rules (Pápai in Econometrica 68, 1403–1433, 2000) and closely resemble Ergin’s priority rules (Ergin in Econometrica 70, 2489–2497, 2002). We prove that if there are at least four objects, these are the only rules that are efficient in two-agent problems, $2$ -consistent, and strategy-proof. A corollary is that these three basic properties together imply the full requirements of efficiency, consistency, group strategy-proofness, and reallocation-proofness.     

A Re-examination of the Performance of Value Strategies in the Athens Stock Exchange

This study tests the performance of contrarian (value) strategies in the Athens Stock Exchange (ASE) in a recent period of time (2003–8) on the basis of the price to earnings ratios, dividend yields, firm size (market value), market to book ratios, financial leverage ratios, and market beta. Apart from the univariate portfolio analysis, we implement a novel panel data analysis based on the procedure suggested by Pesaran (2004, Econometrica 74:967–1012, 2006) that provides a valid estimation and inference under cross sectional dependence. Our portfolio analysis results highlight for investors in the ASE the superiority of value strategies formed on the basis of stocks with low price-to-earnings, high dividend yield ratios, and low market-to-book ratios. Our panel data analysis results depend on whether or not we correct for the problem of cross-sectional correlation in the regression residuals as suggested by Pesaran’s (Econometrica 74:967–1012, 2006) method. When we correct for this problem, we obtain evidence which support only a negative association between annual stock returns and market-to-book ratios. This may imply to investors that an adoption of a value strategy based on the market-to-book ratio may constitute a safer option compared with the other two alternatives suggested by the portfolio analysis results.     

Inequality aversion and separability in social risk evaluation

This paper examines how to satisfy “independence of the utilities of the dead” (Blackorby et al. in Econometrica 63:1303–1320, 1995; Bommier and Zuber in Soc Choice Welf 31:415–434, 2008) in the class of “expected equally distributed equivalent” social orderings (Fleurbaey in J Polit Econ 118:649–680, 2010) and inquires into the possibility to keep some aversion to inequality in this context. It is shown that the social welfare function must either be utilitarian or take a special multiplicative form. The multiplicative form is compatible with any degree of inequality aversion, but only under some constraints on the range of individual utilities.     

Optimal insurance design of ambiguous risks

We examine the characteristics of the optimal insurance contract under linear transaction costs and an ambiguous distribution of losses. Under the standard expected utility model, we know from Arrow (1965) that it contains a straight deductible. In this paper, we assume that the policyholder is ambiguity averse in the sense of Klibanoff et al. (Econometrica 73(6):1849–1892, 2005). The optimal contract depends upon the structure of the ambiguity. For example, if the set of possible priors can be ranked according to the monotone likelihood ratio order, the optimal contract contains a disappearing deductible. We also show that the policyholder’s ambiguity aversion may have the counterintuitive effect to reduce the optimal insurance coverage of an ambiguous risk.     

Trembles in extensive games with ambiguity averse players

We introduce and analyze three definitions of equilibrium for finite extensive games with imperfect information and ambiguity averse players. In a setting where players’ preferences are represented by maxmin expected utility, as characterized in Gilboa and Schmeidler (J Math Econ 18(2):141–153, 1989), our definitions capture the intuition that players may consider the possibility of slight arbitrary mistakes. This generalizes the idea leading to trembling-hand perfect equilibrium as introduced in Selten (Int J Game Theory 4(1):25–55, 1975), by allowing for ambiguous trembles characterized by sets of distributions. We prove existence for two of our equilibrium notions and relate our definitions to standard equilibrium concepts with expected utility maximizing players. Our analysis shows that ambiguity aversion can lead to behavioral implications that are distinct from those attained under expected utility maximization, even if ambiguous beliefs only arise from the possibility of slight mistakes in the implementation of unambiguous strategies.     

The effects of the take-option in dictator-game experiments: a comment on Engel’s (2011) meta-study

In this paper, we report a replication of Engel’s (Exp. Econ. 14(4):583–610, 2011) meta-study of dictator game experiments. We find Engel’s meta-study of dictator game experiments to be robust, with one important exception: the coding of the take-option (List in J. Polit. Econ. 115(3):482–493, 2007; Bardsley in Exp. Econ. 11(2):122–133, 2008; Cappelen et al. in Econ. Lett. 118(2):280–283, 2013). While Engel reports this as having no statistically significant effect, in our replications, we find an economically and statistically significant negative effect on giving in line with the relevant literature.     

Estimating noncooperative and cooperative models of bargaining: an empirical comparison

This paper examines the issue of model selection in studies of strategic situations. In particular, we compare estimation results from a noncooperative formulation of government formulation à la (Baron and Ferejohn in Am Poli Sci Rev 87:34–47, 1989) with those from two alternative cooperative formulations (Nash in Econometrica 18:155–162, 1950; Shapley and Shubik in Am Poli Sci Rev 48:787–792, 1954). Although the estimates of the ministerial ranking are similar, statistical testing suggests that the noncooperative formulation is best fitted to the observed data among the alternative models. This result implies that modeling the noncooperative structure in bargaining situations is crucially important at the risk of possibly misspecifying the details of the game.     

Endogenous population with human and physical capital accumulation

This paper proposes an economic growth model with population growth and physical and human capital accumulation. The physical capital accumulation is built on the Solow growth model (Solow in Q J Econ 70:65–94, 1956). The education and human capital accumulation is influenced by the Uzawa–Lucas model (Uzawa in Int Econ Rev 6:18–31, 1965; Lucas in J Monet Econ 22:3–42, 1988). The population dynamics are influenced by the Haavelmo population model (Haavelmo in a study in the theory of economic evolution. Haavelmo, Amsterdam, 1954) and the Barro–Becker fertility choice model (Barro and Becker in Econometrica 57:481–501, 1989). We synthesize these dynamic forces in a compact framework, applying an alternative utility function proposed by Zhang (Econ Lett 42:105–110, 1993). The model describes a dynamic interdependence between population change, wealth accumulation, human capital accumulation, and division of labor. We simulate the model to demonstrate the existence of equilibrium points and to plot the motion of the dynamic system. We also examine the effects of changes in the propensity to have children, the mortality rate parameter, the propensity to receive education, the human capital utilization efficiency, and the mortality rate elasticity of human capital upon dynamic paths of the system.     

Fictitious students creation incentives in school choice problems

We identify a new channel through which schools can potentially manipulate the well-known student and school-optimal stable mechanisms. We introduce two fictitious students creation manipulation notions where one of them is stronger. While the student and school-optimal stable mechanisms turn out to be weakly fictitious student-proof under acyclic (Ergin in Econometrica 88:485–494, 2002) and essentially homogeneous (Kojima in Games Econ Behav 82:1–14, 2013) priority structures, respectively, they still lack strong fictitious student-proofness. We then compare the mechanisms in terms of their vulnerability to manipulations in the sense of Pathak and Sönmez (Am Econ Rev 103(1):80–106, 2013) and find out that the student-optimal stable mechanism is more manipulable than the school-optimal one. Lastly, in the large market setting of Kojima and Pathak (Am Econ Rev 99(3):608–627, 2009), the student-optimal stable mechanism becomes weakly fictitious student-proof as the market is getting large.     

Second-order ambiguous beliefs

This paper axiomatizes models of second-order ambiguous beliefs in the original domain of preferences of Anscombe and Aumann (Ann Math Stat 34:199–205, 1963) by weakening the first-stage independence postulate. The models we propose include the second-order subjective expected utility (SOSEU) of Seo (Econometrica 77:1575–1605, 2009) as a particular case. We characterize the intersection of our models of second-order ambiguity with the canonical models of (first-order) ambiguity aversion and provide a further generalization of SOSEU by relaxing the completeness axiom.     

Bargaining over productivity and wages when technical change is induced: implications for growth, distribution, and employment

I study a model of growth and income distribution in which workers and firms bargain à la Nash (Econometrica 18(2):155–162, 1950) over wages and productivity gains, taking into account the trade-offs faced by firms in choosing factor-augmenting technologies. The aggregate environment resulting from self-interested, objective function-maximizing decision rules on wages, productivity gains, savings and investment, is described by a two-dimensional dynamical system in the employment rate and output/capital ratio. The economy converges cyclically to a long-run equilibrium involving a Harrod-neutral profile of technical change, a constant rate of employment of labor, and constant input shares. The type of oscillations predicted by the model is qualitatively consistent with the available data on the United States (1963–2003), replicates the dynamics found in earlier models of growth cycles such as Goodwin (A growth cycle, in C.H. Feinstein (ed). Socialism, Capitalism and Economic Growth. Cambridge University Press, Cambridge 1967. Cambridge University Press, Cambridge, 1967); Shah and Desai (Econ J 91:1006–1010, 1981); van der Ploeg (J Macroecon 9:1–12, 1987); Flaschel (J Econ: Zeitschrift für Nationalökonomie 44:63–69, 1984) and Sportelli (J Econ: Zeitschrift für Nationalökonomie 61(1):35–64, 1995), and can be verified numerically in simulations. Institutional change, as captured by variations in workers’ bargaining power, has a positive effect on the long-run rate of growth of output per worker but a negative effect on long-run employment. Economic policy can also affect the growth and distribution pattern through changes in the unemployment compensation, which also have a positive long-run impact on labor productivity growth but a negative long-run impact on employment. In both cases, employment can overshoot its new equilibrium value along the transitional dynamics.     

Optimality of impulse harvesting policies

We explore the link between cyclical and smooth resource exploitation. We define an impulse control framework which can generate both cyclical solutions and steady-state solutions. Our model can admit convex and concave profit functions and allows the integration of different stock-dependent profit functions. We show that the strict concavity of the profit function is only a special case of a more general condition, related to submodularity, that ensures the existence of optimal cyclical policies. We then establish a link with the discrete-time models with cyclical solutions by Benhabib and Nishimura (J Econ Theory 35:284–306, 1985) and Dawid and Kopel (J Econ Theory 76:272–297, 1997). For the steady-state solution, we explore the relation to Clark’s (1976) continuous control model.     

Cobb-Douglas preferences under uncertainty

This paper axiomatizes Cobb-Douglas preferences under uncertainty. First, we extend the original Trockel (Econ Lett 30:7–10, 1989)’s axiomatic foundation to a general state space framework based on the Strong Homotheticity Axiom, obtaining also the incomplete case a la Bewley (Decis Econ Financ 25:79–110, 2002). We show that this key axiom for the Cobb-Douglas expected utility specification is refuted by Ellsberg’s uncertainty aversion behavioral pattern. Our main result provides a set of meaningful axioms characterizing Cobb-Douglas min-expected utility preferences, an important class of uncertainty averse preferences for studying the consequences of ambiguity in finance and other fields. Finally, we present briefly how to obtain more general representations like the variational case.     

The empirical relevance of the Mises-Hayek theory of the trade cycle

Austrian Business Cycle Theory (ABCT), as espoused by Mises (1912, 1949) and Hayek (1935), predicts changes in the economy’s structure of production following an unexpected change in monetary policy. In particular, following a credit expansion the theory predicts that: previously idle resources are drawn into the market, previously employed resources are used more intensively, and prices and quantities of goods in the intermediate stages of production decline relative to the prices and quantities of goods in other stages. To test the theory’s implications we employ stage of process data which classify goods by their distance to final consumption. Using this data we run structural vector autoregressions and isolate each variable’s response to a monetary shock. Consistent with the theory, we find that resource use expands on the intensive and extensive margin. On the other hand, we find little evidence of the relative price and quantity effects predicted by ABCT. Since the relative price effects are the distinguishing aspect of ABCT, we conclude that evidence in favor of the theory is, at best, mixed.     

Detecting multiple breaks in long memory the case of U.S. inflation

Multiple structural change tests by Bai and Perron (Econometrica 66:47–78, 1998) are applied to the regression by Demetrescu et al. (Econ Theory 24:176–215, 2008) in order to detect breaks in the order of fractional integration. With this instrument we tackle time-varying inflation persistence as an important issue for monetary policy. We determine not only the location and significance of breaks in persistence, but also the number of breaks. Only one significant break in U.S. inflation persistence (measured by the long-memory parameter) is found to have taken place in 1973, while a second break in 1980 is not significant.     

Information revelation in competitive markets

This paper analyzes a market with multiple sellers and horizontally differentiated products. We investigate the sellers’ incentives to reveal product relevant information that affects the buyer’s private valuation. The main finding is that if the number of sellers is sufficiently large, there is a unique symmetric equilibrium with full information disclosure. Thus, unlike the results by Lewis and Sappington (Int Econ Rev 35:309–327, 1994) and Johnson and Myatt (Am Econ Rev 93:756–784, 2006) for monopoly, which state that the monopolist reveals either full information or no information, intense competition results in a single extreme with respect to information disclosure. We show that the market is always inefficient, but the magnitude of inefficiency converges to zero at a high rate as competition intensifies.     

Futures market: contractual arrangement to restrain moral hazard in teams

Holmstrom (Bell J Econ 13:324?C340, 1982) argues that a principal is required to restrain moral hazard in a team: wasting output in certain states is required to enforce efficient effort, and the principal is a commitment device for the waste. Under competition in commodity and team-formation markets, I extend his model à la Prescott and Townsend (Econometrica 52(1):21?C45, 1984) to show that competitive contracts can exploit the futures market to transfer output across states instead of wasting it. Thus, the futures market takes the place of a principal as a commitment device. Exploiting the duality of linear programming, I characterize the market environment and the contractual agreements for incentive-constrained efficiency.