Confronting the risk of asset loss: What role do livestock transfers in northern Kenya play?

In many low-income, high-risk environments households participate in informal risk sharing institutions involving inter-household transfers. This study focuses on: asset transfers and asset risk; the influence of past behavior on access to transfers; and wealth-differentiated transfer behavior. Panel data on livestock transfers in northern Kenya are analyzed. Three explanations of livestock transfers are investigated: ex post insurance; ex ante precautionary savings; and redistribution. Findings indicate that livestock transfers are of limited effectiveness in addressing asset risk and avoiding poverty. The findings have implications for both research on risk sharing institutions and for the design of development policies in pastoral areas.     

On the Economic Meaning of Machina's Fréchet Differentiability Assumption

This note shows that M. J. Machina's (1982, Econometrica50, 277-323) assumption that preferences over lotteries are smooth has some economic implications. We show that Fréchet differentiability implies that preferences represent second order risk aversion (as well as conditional second order risk aversion). This implies, among other things, that decision makers buy full insurance only at the absence of marginal loading. We also show that with constant absolute and relative risk aversion, expected value maximization, second order risk aversion, and Fréchet differentiability are equivalent. Journal of Economic Literature Classification Number: D81.     

Learning,Matching, and Aggregation

Fictitious play and stimulus–response/reinforcement learning are examined in the context of a large population where agents are repeatedly randomly matched. We show that the aggregation of this learning behavior can be qualitatively different from learning at the level of the individual. This aggregate dynamic belongs to the same class of simply defined dynamic as do several formulations of evolutionary dynamics. We obtain sufficient conditions for convergence and divergence which are valid for the whole class of dynamics. These results are therefore robust to most specifications of adaptive behavior.Journal of Economic LiteratureClassification Numbers: C72, D83.     

Private Value Allocations in Large Economies with Differential Information

We consider a Radner-type (e.g., Radner, 1968, Econometrica36, 31–58) pure exchange economy with differential information and a continuum of agents. We show that under appropriate assumptions the set of Aumann–Shapley private value allocations in such an economy coincides with the set of Radner competitive equilibrium allocations. Journal of Economic Literature Classification Numbers: C71, D51, D82.     

Does Intrinsic Habit Formation Actually Resolve the Equity Premium Puzzle?

G. M. Constantinides (1990, Journal of Political Economy98, 519–543) describes a simple model of intrinsic habit formation that appears to resolve the “equity premium puzzle” of R. Mehra and E. C. Prescott (1985, Journal of Monetary Economics15, 145–161). This finding is particularly important, since it has motivated a broader consideration of the implications of habit formation preferences in dynamic equilibrium models. However, consumption growth actually behaves very differently pre- and post-1948, and the explanatory power of the habit formation model is driven by the pre-1948 data. Using data from 1949 to 2000, constructed in a manner comparable to R. Mehra and E. C. Prescott, I demonstrate that intrinsic habit cannot rationalize the unconditional moments of discrete consumption and real asset returns with values of the risk aversion coefficient that are less than four times larger than the values found by G. M. Constantinides for any feasible calibration of the model. Journal of Economic Literature Classification Numbers: E21, G12.     

Job Matching and Coalition Formation with Utility or Disutility of Co-workers

This paper studies the job matching market in Kelso and Crawford (1982), Econometrica50, 1483–1504, with one exception, that co-workers may generate utility or disutility in the workplace. We provide a simple idea to show how a great number of sufficient conditions for a nonempty core in the literature can be extended to this labor market. A generalized competitive equilibrium with a tax/subsidy system is also discussed. Journal of Economic Literature Classification Number: D71.     

The Phillips Curve and Optimal Policy in a Structural Signal Extraction Model

We study a monetary economy subject to “signal extraction” problems, and investigate within that framework the positive and normative aspects of monetary policy. As in Lucas (1972, Journal of Economic Theory,4, 103–124; 1973, American Economic Review, 63, 326–334), imperfect signal perception generates macroeconomic correlations similar to those found in the “Phillips curve” literature. Moving to normative aspects, we find that, when aggregate shocks are present, traditional nonactivist policies do not permit reaching the first best, and that an intelligent activist policy always leads to better outcomes. The specific characteristics and effectiveness of this optimal policy also depend crucially on the problem of signal extraction. Journal of Economic Literature Classification Number: E5.     

Evolution in Games with Endogenous Mistake Probabilities

J. Bergin and B. Lipman (Econometrica64 (1996), 943-956) show that the selection effect from the random mutations in the adaptive population dynamics in M. Kandori, G. Mailath, and R. Rob (Econometrica61 (1993), 29-56) and P. Young (Econometrica61 (1993), 57-84) is due to restrictions on how these mutation rates vary across population states. We here model mutation rates as endogenously determined mistake probabilities, by assuming that players with some effort can control the probability of implementing the intended strategy. This is shown to corroborate the results in Kandori-Mailath-Rob (1993) and, under certain regularity conditions, those in Young (1993). Journal of Economic Literature Classification Number: C72.     

On Forward Induction and Evolutionary and Strategic Stability

We analyze which normal form solution concepts capture the notion of forward induction, as defined by E. van Damme (1989, J. Econ. Theory48, 476-496) in the class of generic two player normal form games preceded by an outside option. We find that none of the known strategic stability concepts (including Mertens stable sets and hyperstable sets) capture this form of forward induction. On the other hand, we show that the evolutionary concept of EES set (J. Swinkels, 1992, J. Econ. Theory57, 306-332) is always consistent with forward induction. Journal of Economic Literature Classification Number: C72.     

Evolutionary Learning in Signalling Games

We study equilibrium selection by evolutionary learning in monotone two-type signalling games. The learning process we study extends that introduced by Young (1993, Econometrica61, 57–84) to deal with incomplete information and sequential moves; it thus involves stochastic trembles. For vanishing trembles the process gives rise to strong selection among sequential equilibria: if the game has separating equilibria, then in the long run only play according to the so-called Riley equilibrium will be observed frequently. Journal of Economic Literature Classification Number: C72.     

Debt Overhang and Barter in Russia

This paper develops a model in which costly barter is used by firms to protect working capital against outside creditors. Although creditors could agree to postpone debt payments and to avoid destroying the firm's working capital, if the firm cannot commit not to divert cash ex post, the outcome of renegotiation still provides ex ante incentives to use barter. We show that the greater is the debt overhang, the more likely is the use of barter, with and without the possibility of debt restructuring. Empirical evidence from Russian firm-level data is shown to be consistent with the model's predictions. J. Comp. Econ., December 2002, 30(4), pp. 635–656. New Economic School, CEFIR, CEPR, and WDI, Nakhimovsky pr. 47, Moscow 117418, Russia; Sloan School of Management, M.I.T., 50 Memorial Drive, Cambridge, Massachusetts 02142; and ROSES–CNRS and CEPR, Maison des Sciences économiques, 106–112 Bd de l'Hôpital, 75647 Paris Cedex 13, France. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.Journal of Economic Literature Classification Numbers: E41, G34, P31.     

Idiosyncratic Risk in the United States and Sweden: Is There a Role for Government Insurance?

We examine the effects of government redistribution schemes in an economy where agents are subject to uninsurable, individual specific productivity risk. In particular, we consider the trade-off between positive insurance effects and negative distortions on labor supply and saving. We parameterize the model by estimating productivity processes on Swedish and U.S. data. The estimation results show that agents in the United States are subject to more idiosyncratic risk than agents in Sweden. Although distortions are significant, the welfare benefits of government redistribution and insurance systems can be substantial. Journal of Economic Literature Classification Numbers: E20, H21.     

Perfect versus Imperfect Observability—An Experimental Test of Bagwell's Result

In a seminal paper Bagwell ((1995). Games Econom. Behav.8, 271–280) claims that the first mover advantage, i.e., the strategic benefit of committing oneself to an action before others can, vanishes completely if this action is only imperfectly observed by second movers. In our paper we report on an experimental test of this prediction. We implement four versions of a game similar to an example given by Bagwell, each time varying the quality of the signal which informs the second mover. For experienced players we do not find empirical support for Bagwell's result. Journal of Economic Literature Classification Numbers: C72, C92.     

Demand Uncertainty, Incomplete Markets, and the Optimality of Rationing

When the arrival of traders at the market is stochastic, and it is impossible for traders who might arrive to meet ex ante, then Walrasian spot-market clearing presents consumers with price-risk and is typically not Pareto optimal. Instead, with an indivisible good and a divisible numeraire, the first-best can be achieved by an “Exchange” selling raffle tickets at a fixed price. When only spot market trading is feasible and consumers cannot commit to pay unless they purchase the indivisible good, efficiency implies price-fixing with rationing. Potential disadvantages of black markets and scalping are discussed.Journal of Economic LiteratureClassification Numbers: D45, D52, D8.     

Business Cycle Asymmetries: International Evidence

This paper uses the Triples test of Randles et al. (1980, Journal of the American Statistical Association, 75, 168–172) to detect asymmetries in U.S. as well as international GDP fluctuations. The test does not detect any asymmetry in the distribution of the U.S. GDP, which is consistent with previous empirical findings. However, significant asymmetries are found in international data. Detection of asymmetries is a first step toward model-selection process such that stylized facts can be replicated. Journal of Economic Literature Classification Numbers: E3, E32, C14.     

Water allocation,crop choice,and priority services

We analyze the problem of allocating irrigation water among heterogeneous farmers when water supply is stochastic. If farmers are risk-neutral, a spot market for water is efficient; while the oft-used uniform rationing system is inefficient, both ex ante and ex post. Indeed, we show that it leads farmers to overexpose to risk, thus making shortages more severe and more frequent in case of drought. We propose instead a regulation by priority classes extending Wilson, and we derive an efficiency result. We characterize the set of farmers that would win or lose from such a reform. We also argue that a system of priority classes may be preferred to a spot market system, because scarcity is easier to manage ex ante than ex post, and because this system facilitates the supply of insurance to risk-averse agents.     

A New Solution to the Random Assignment Problem

A random assignment is ordinally efficient if it is not stochastically dominated with respect to individual preferences over sure objects. Ordinal efficiency implies (is implied by) ex post (ex ante) efficiency. A simple algorithm characterizes ordinally efficient assignments: our solution, probabilistic serial (PS), is a central element within their set. Random priority (RP) orders agents from the uniform distribution, then lets them choose successively their best remaining object. RP is ex post, but not always ordinally, efficient. PS is envy-free, RP is not; RP is strategy-proof, PS is not. Ordinal efficiency, Strategyproofness, and equal treatment of equals are incompatible. Journal of Economic Literature Classification Numbers: C78, D61, D63.     

House Allocation with Transfers

We consider the Shapley–Scarf house allocation problem where monetary transfers are allowed. We characterize the class of mechanisms that are strategy-proof, ex post individually rational, ex post budget-balanced, and “collusion-proof.” In these mechanisms, the price of each object is fixed in advance, and the objects are reallocated according to the (unique) core assignment of the Shapley–Scarf economy associated with the prices. The special case in which all prices are zero is the core mechanism studied by Shapley and Scarf. Our mechanisms are compelling alternatives to the Groves mechanisms, which satisfy neither budget balance nor our condition of collusion-proofness. Journal of Economic Literature Classification Numbers: C71, C78, D71, D78, D89.     

Zermelo and the Early History of Game Theory

In the modern literature on game theory there are several versions of what is known as Zermelo's theorem. It is shown that most of these modern statements of Zermelo's theorem bear only a partial relationship to what Zermelo really did. We also give a short survey and discussion of the closely related but almost unknown work by König (1927, Acta Sci. Math. Szeged, 3, 121–130) and Kálmar (1928/29, Acta Sci. Math. Szeged, 4, 65–85). Their papers extend and considerably generalize Zermelo's approach. A translation of Zermelo's paper is included in the Appendix. Journal of Economic Literature Classification Numbers: B19; C70; C72.     

On the Enforcement of Cooperative Environmental Policies

This paper investigates the sustainability of Pareto optimal policies for the replenishment of renewable resources shared by two countries with asymmetrical wealth. It does so within a two-country neoclassical growth model with externality. In the absence of commitment, it identifies simple self-enforcing mechanisms that implement social optima for a typical international resource (clean air) and a parametrization of the model to the United States and a country five times poorer. Such mechanisms are trigger strategies involving transfers of wealth between countries and threats of economic isolation in case of defection. Necessary transfers can represent up to 2.6% of U.S. wealth. Journal of Economic Literature Classification Numbers: Q20, C73, C68