Optimal speculative trade among large traders

A collection of large traders holds heterogeneous prior beliefs regarding market fundamentals. This gives them a motive to engage in speculative trade with respect to market prices. Rather than assuming a particular institution or market for speculative trade, we take a mechanism-design approach by attempting to characterize the mechanism that maximizes the traders’ gains from speculative trade, subject to the incentive constraints that result from the traders’ ability to manipulate market prices. Within a stylized market model, we show that this mechanism affects price volatility without destroying ex-post efficient allocations. We also characterize the implementability of optimal speculative trade when the traders’ prior beliefs are private information. Financial support from the US-Israel Binational Science Foundation, Grant No. 2002298 is gratefully acknowledged.     

The Majoritarian Compromise in large societies

First, we dwell on the definition of the Majoritarian Compromise in the case of an odd number of alternatives. Then, assuming the Impartial Culture hypothesis we calculate the average maximum welfare achievable by the Majoritarian Compromise procedure and show that this social choice rule is asymptotically stable with the proportion of the number of unstable profiles to the total number of profiles being in the order of ,(¹We write in case there is a positive constant C such that for all sufficiently large values of ) where n is the total number of agents. I am grateful to Prof. Semih Koray for his invitation to visit the Center for Economic Design and the Department of Economics of Boğazi?i University in Turkey during the spring semester of 1999. I appreciate the stimulating discussions with Prof. Murat Sertel about the properties of the Majoritarian Compromise which I had during my stay there. I am also grateful to an anonymous referee whose remarks helped to significantly improve the exposition. A partial support from TüBİTAK NATO PC-B Programme is gratefully acknowledged.     

The role of internal agents in starting salary negotiations

We introduce the concept that internal organizational agents who negotiate starting salary packages with job applicants may not always act in the organization's best interests. To gain an understanding of what motivates the internal agent toward assuming a particular role, we use expectancy theory, agency theory and concepts from the negotiations literature. We describe the roles that agents may assume, identify factors that impact agents' motivation, and formulate propositions to help identify which role an agent is likely to enact in starting salary negotiations. We form propositions as to how these roles are likely to impact final negotiation outcomes of probability of hiring, salary size, and applicant satisfaction and discuss strategies for ensuring agents are motivated to enact a role that meets organizational objectives.     

Volatility clustering and herding agents: does it matter what they observe?

Recent agent-based models have demonstrated that agents’ herding behavior causes volatility clustering in stock markets. We examine economies where agents herd on others, yet they have limited sets of information on other agents to imitate. In particular, we conduct experiments on economies with agents with different levels of information sharing where agents can imitate: (1) the strategies of others but with an error, (2) the strategies of only a fraction of agents, or (3) the strategies of others, but update their parameters only by a proportion. In each experiment we change the likelihood that agents make errors to copy the strategy of others, the fraction of agents to herd, or the proportion of the parameter that agents update, in order to examine the effect of the different degrees of information sharing on volatility clustering. We show that volatility clustering tends to disappear when agents have limited information on the strategies of others, and agents need to imitate the strategy details of others in order to generate the clustered volatility.     

Coordination in the El Farol Bar problem: The role of social preferences and social networks

In this paper, we continue the pursuit of the self-coordination mechanism as studied in the El Farol Bar problem. However, in addition to efficiency (the optimal use of the public facility), we are also interested in the distribution of the public resources among all agents. Hence, we consider variants of the El Farol Bar problem, to be distinguished from many early studies in which efficiency is the only concern. We ask whether self-coordinating solutions can exist in some variants of the El Farol Bar problem so that public resources can be optimally used with neither idle capacity nor congestion being incurred and, in the meantime, the resources can be well distributed among all agents. We consider this ideal situation an El Farol version of a “good society”. This paper shows the existence of a positive answer to this inquiry, but the variants involve two elements, which were largely left out in the conventional literature on the El Farol Bar problem. They are social networks and social preferences. We first show, through cellular automata, that social networks can contribute to the emergence of a “good society”. We then show that the addition of some inequity-averse agents can even guarantee the emergence of the “good society”.     

A two-stage double-bootstrap data envelopment analysis of efficiency differences of New Zealand secondary schools

We conduct a two-stage (DEA and regression) analysis of the efficiency of New Zealand secondary schools. Unlike previous applications of two-stage semi-parametric modelling of the school “production process”, we use Simar and Wilson’s double bootstrap procedure, which permits valid inference in the presence of unknown serial correlation in the efficiency scores. We are therefore able to draw robust conclusions about a system that has undergone extensive reforms with respect to ideas high on the educational agenda such as decentralised school management and parental choice. Most importantly, we find that school type affects school efficiency and so too does teacher quality.     

Estimating regression coefficients from survey data by asymptotic design-cum-model based approach

Postulating a linear regression of a variable of interest on an auxiliary variable with values of the latter known for all units of a survey population, we consider appropriate ways of choosing a sample and estimating the regression parameters. Recalling Thomsen’s (1978) results on non-existence of ‘design-cum-model’ based minimum variance unbiased estimators of regression coefficients we apply Brewer’s (1979) ‘asymptotic’ analysis to derive ‘asymptotic-design-cummodel’ based optimal estimators assuming large population and sample sizes. A variance estimation procedure is also proposed.     

Efficient trading with restriction

In a classical paper by Cramton, Gibbons, and Klemperer (CGK) (Econometrica 55:615–632, 1987), it is shown that an efficient trading mechanism exists if traders’ initial endowments are not too asymmetric. In this paper, we extend the CGK model by assuming that traders are not allowed to consume more than a given amount (upper bound) of the good. In the CGK model, instead the only restriction is that no agent can consume more than the entire endowment in the economy. By varying this upper bound, we characterize the set of endowments (efficient region) in which efficient trading mechanisms exist in terms of this upper bound. We show that the efficient region becomes smaller when the upper bound decreases. On the other hand, when this upper bound becomes the entire endowment of the economy, we obtain the result in CGK as a special case.     

Gap-minimizing prices and quadratic core convergence

We study the decentralization of core allocations by price vectors chosen, essentially, to minimize the competitive gap. In the setting of Debreu (1975) and Grodal (1975), the competitive gap with respect to these gap-minimizing prices goes to zero as the inverse of the square of the number of agents; in Debreu's setting, the convergence is uniform over agents while in Grodal's setting, we show convergence on average.     

A strategic analysis of network reliability

Abstract. We consider a non-cooperative model of information networks where communication is costly and not fully reliable. We examine the nature of Nash networks and efficient networks. We find that if the society is large, and link formation costs are moderate, Nash networks as well as efficient networks will be ‘super-connected’ i.e. every link is redundant in the sense that the network remains connected even after the link is deleted. This contrasts with the properties of a deterministic model of information decay, where Nash networks typically involve unique paths between agents. We also find that if costs are very low or very high, or if links are highly reliable then there is virtually no conflict between efficiency and stability. However, for intermediate values of costs and link reliability, Nash networks may be underconnected relative to the social optimum.     

A meta-validation model for assessing the score-validity of student teaching evaluations

Virtually every institution of higher education in the US uses some type of student teaching evaluation (STE) instrument as a means of assessing instructors’ instructional performance in courses. Unfortunately, many administrators and faculty misinterpret STE ratings. Therefore, the present article provides a comprehensive critique of STE instruments. In particular, we build on Messick’s (Educational Measurement, MacMillan, pp. 13–103, and Messick (Am. Psychol., 50, 741–749, 1995, 1989) conceptualization of validity to yield what we refer to as a meta-validity model that subdivides content-, criterion-, and construct-related validity into several areas of evidence. We use our meta-validity model to conduct a meta-validity analysis of STEs. Specifically, we assessed the score-validity of STEs based on findings from the extant literature. We conclude that strong evidence has been provided with respect to areas of criterion-related validity; however, for the most part, weak or inadequate evidence has been provided with regard to areas of both content-related and construct-related validity. This seriously calls into question both the score-validity and utility of STEs.     

Learning about fiscal policy and the effects of policy uncertainty

In this paper we ask how uncertainty about fiscal policy affects the impact of fiscal policy changes on the economy when the government tries to counteract a deep recession. The agents in our model are uncertain about the conduct of fiscal policy and act as econometricians by estimating fiscal policy rules that might change over time.We find that assuming that agents are not instantaneously aware of the new fiscal policy regime in place leads to substantially more volatility in the short run and persistent differences in average outcomes. We highlight issues that can arise when a policymaker wants to announce a policy change. From a methodological perspective, we introduce a novel way to model learning in the face of discrete policy changes.     

Consistency and its converse: an introduction

This essay is a didactic introduction to the literature on the “consistency principle” and its “converse”. An allocation rule is consistent if for each problem in its domain of definition and each alternative that it chooses for it, then for the “reduced problem” obtained by imagining the departure of an arbitrary subgroup of the agents with their “components of the alternative” and reassessing the options open to the remaining agents, it chooses the restriction of the alternative to that subgroup. Converse consistency pertains to the opposite operation. It allows us to deduce that a rule chooses an alternative for a problem from the knowledge that for each two-agent subgroup, it chooses its restriction to the subgroup for the associated reduced problem this subgroup faces. We present two lemmas that have played a critical role in helping understand the implications of these properties in a great variety of models, the Elevator Lemma and the Bracing Lemma. We describe several applications. Finally, we illustrate the versatility of consistency and of its converse by means of a sample of characterizations based on them.     

Heterogeneity in Economics

This paper argues that heterogeneity of agents’ characteristics plays a fundamental role in the economy and should do so in economic models. Three aspects are considered. Firstly the notion that assuming heterogeneity was a solution to the problem posed by the results of Sonnenschein Mantel and Debreu is considered and it is suggested that the more pragmatic approach adopted by Hildenbrand is likely to be more productive. Next the role of adaptation and evolution which necessarily involve variety or heterogeneity is examined. It is suggested that heterogeneity will persist since agents will only slowly learn to adapt and that in the meantime the environment will change. Lastly the role of heterogeneity in financial markets is examined. It is suggested that heterogeneous and varying expectations may account for many of the stylised facts which do not seem to be consistent with the standard financial markets model.“Variety is the spice of life”     

Structural holes, innovation and the distribution of ideas

We model knowledge diffusion in a population of agents situated on a network, interacting only over direct ties. Some agents are by nature traders, others are by nature “givers”: traders demand a quid pro quo for information transfer; givers do not. We are interested in efficiency of diffusion and explore the interplay between the structure of the population (proportion of traders), the network structure (clustering, path length and degree distribution), and the scarcity of knowledge. We find that at the global level, trading (as opposed to giving) reduces efficiency. At the individual level, highly connected agents do well when knowledge is scarce, agents in clustered neighbourhoods do well when it is abundant. The latter finding is connected to the debate on structural holes and social capital.     

Existence of solutions to principal–agent problems with adverse selection under minimal assumptions

We prove an existence result for the principal–agent problem with adverse selection under general assumptions on preferences and allocation spaces. Instead of assuming that the allocation space is finite-dimensional or compact, we consider a more general coercivity condition which takes into account the principal’s cost and the agents’ preferences. Our existence proof is simple and flexible enough to adapt to partial participation models as well as to the case of type-dependent budget constraints.     

Opinion dynamics and wisdom under conformity

We study a dynamic model of opinion formation in social networks. In our model, boundedly rational agents update opinions by averaging over their neighbors’ expressed opinions, but may misrepresent their own opinion by conforming or counter-conforming with their neighbors. We show that an agent׳s social influence on the long-run group opinion is increasing in network centrality and decreasing in conformity. Concerning efficiency of information aggregation or “wisdom” of the society, it turns out that misrepresentation of opinions need not undermine wisdom, but may even enhance it. Given the network, we provide the optimal distribution of conformity levels in the society and show which agents should be more conforming in order to increase wisdom.     

On the dynamics of national scientific systems

Coauthorship links actors at the micro-level of scientists. Through electronic databases we now have enough information to compare entire research disciplines over time. We compare the complete longitudinal coauthorship networks for four research disciplines (biotechnology, mathematics, physics and sociology) for 1986–2005. We examined complete bibliographies of all researchers registered at the national Slovene Research Agency. Known hypotheses were confirmed as were three new hypotheses. There were different coauthoring cultures. However, these cultures changed over time in Slovenia. The number of coauthored publications grew much faster than solo authored productions, especially after independence in 1991 and the integration of Slovenian science into broader EU systems. Trajectories of types of coauthorship differed across the disciplines. Using blockmodeling, we show how coauthorship structures change in all disciplines. The most frequent form was a core-periphery structure with multiple simple cores, a periphery and a semi-periphery. The next most frequent form had this structure but with bridging cores. Bridging cores consolidate the center of a discipline by giving it greater coherence. These consolidated structures appeared at different times in different disciplines, appearing earliest in physics and latest in biotechnology. In 2005, biotechnology had the most consolidated center followed by physics and sociology. All coauthorship networks expanded over time. By far, new recruits went into either the semi-periphery or the periphery in all fields. Two ‘lab’ fields, biotechnology and physics, have larger semi-peripheries than peripheries. The reverse holds for mathematics and sociology, two ‘office’ disciplines. Institutional affiliations and shared interests all impact the structure of collaboration in subtle ways.     

On the natural selection rule in general linear models

We consider a problem of selecting the best treatment in a general linear model. We look at the properties of the natural selection rule. It is shown that the natural selection rule is minimax under to “0–1” loss function and it is a Bayes rule under a monotone permutation invariant loss function with respect to a permutation invariant prior for every variance balanced design. Some other condition on the design matrix is given so that a Bayes rule with respect to a normal prior will be of simple structure.     

Testing the Information Structure of Eastern European Markets: The Warsaw Stock Exchange

This paper investigates the content of the information set used by the agents in the Warsaw Stock Exchange - WSE. Three “candidate variables” are examined — consumers’ prices, the zloty/US$ exchange rate and the refinancing rate of the National Bank of Poland — with respect to three WSE stocks, from different sectors of the economy. The methodology employed supposes that the innovations in the price series are orthogonal to all variables within or outside the information set. Beyond the question of how to specify the agents expectations, the WSE trading rules and the high volatility period present in all monthly price series were additional problems to render it operational. Given the solutions adopted, in only three out of the nine cases tested, it was possible to reject the null that the candidate did not belong to the information set. This is a signal that macroeconomic fundamentals are still absent from the WSE. This revised version was published online in July 2006 with corrections to the Cover Date.