Economic implications of better information in a dynamic framework

Summary. We consider an OLG model with accumulation in human capital and analyze the economic implications of information about individual skills. Agents in each period differ by the random innate ability assigned to each individual. When young, all agents are screened for their abilities and this screening process (signal) constitutes a public information which is used in choosing the level of private investment in education. We demonstrate that in the presence of risk sharing markets better information may be harmful for all in equilibrium, and find conditions under which better information either enhances growth or reduces growth.Received: 8 September 2003, Revised: 3 March 2004, JEL Classification Numbers: D80, J24.Correspondence to: Bernhard EckwertWe are pleased to acknowledge the useful comments and suggestions of R. Benabou, Z. Eckstein, E. Helpman, B. Ravikumar and D. Tsiddon. Also, special thanks are given to two anonymous referees. This research was supported by a Grant from G.I.F., the German-Israeli Foundation for Scientific Research and Development.     

Sophisticated play by idiosyncratic agents

Agents are drawn from a large population and matched to play a symmetric coordination game, the payoffs of which are perturbed by agent-specific heterogeneity. Individuals observe a (possibly sampled) history of play, which forms the initial hypothesis for an opponent's behaviour. Using this hypothesis as a starting point, the agents iteratively reason toward a Bayesian Nash equilibrium. When sampling is complete and the noise becomes vanishingly small, a single equilibrium is played almost all the time. A necessary and sufficient condition for selection, shown to be closely related (but not identical) to risk-dominance, is derived. When sampling is sufficiently incomplete, the risk-dominant equilibrium is played irrespective of the history observed.JEL Classification: C72, C73The authors thank Tom Norman, Kevin Roberts, Hyun Shin, Peyton Young, the editor and an anonymous referee for helpful comments. Correspondence to: C. Wallace     

The pigeon breeders' cup: a selection on selection theory of economic evolution

Both the evolutionary literature in economics and the competitive advantage literature in business strategy point to the importance of a firm's replication/selection mechanisms in developing and sustaining inimitable organization capabilities, competencies, competitive advantage and economic rents. This mechanism can be conceived of as a hierarchy of organization processes where primary, added-value processes are nested within control processes, which are nested within deployment processes, that are nested within learning processes. The evolution of this organization of processes and their complementary assets along the added-value chain within the firm and among firms is the result of the legacy of the past process-thinking skills of the firms in the added-value chain and their present thinking skills. Served and factor markets select on the dynamic effects and products of these processes and, hence, ultimately on the phenomenon that create the processes (process thinking). This selection on selection (SoS) theory is used to explain Schumpeterian ?creative destruction? at a new level of analysis, extend the satisficing principle, and identify a new stream of potentially promising empirical research.JEL Classification: A1, B31, B52, D21, M1Comments by Geoffrey M. Hodgson, Alan J. Malter, Paul W. Miniard, Paul W. Farris, and an anonymous reviewer on earlier drafts of this paper are gratefully acknowledged. The editing of Kathryn Morris is also appreciated.     

Modelling the Stochastic Component of Behaviour in Experiments: Some Issues for the Interpretation of Data

This paper considers some of the questions raised by the fact that people's behaviour—including their behaviour in experimental environments—has a stochastic component. The nature of this component may be crucial to the interpretation of the patterns of data we observe and the choice of statistical criteria for favouring one hypothesis at the expense of others. However, it is arguable that insufficient consideration has been given to the way(s) in which the stochastic element is modelled. The paper aims to explore some of the issues involved. JEL Classification: C12, C73, C91     

The Willingness to Accept Value of Statistical Life Relative to the Willingness to Pay Value: Evidence and Policy Implications

Large disparities between willingness to accept (WTA) and willingness to pay (WTP) based values of statistical life are commonly encountered in empirical studies. Standard economic theory suggests that if a public good is easily substitutable there should be no marked disparity between WTA and WTP values for the good, though the disparity increases with reduced substitutability. However, psychologists have shown that people often treat gains and losses asymmetrically and tend to require a substantially larger increase in wealth to compensate for a loss than the amount they would be willing to pay for an equivalent gain. Although most transport projects may aim to improve safety, situations arise when a relaxation of an existing regulation saves resources but increases the risk of death and injuries. A survey was recently carried out in New Zealand to determine people’s willingness to pay to reduce road risks and their willingness to accept compensation for an increase in risk. This paper reports the disparity observed between the two measures and considers some of the problems posed for policymakers.     

The optimal degree of commitment in a negotiation with a deadline

Summary. This note explores the consequences of a player's freedom of choice over his degree of commitment for the bargaining outcome. In particular, we modify the nonstationary structure of Fershtman and Seidmann (1993)'s bargaining by allowing one player to possess imperfect commitments where the degree of commitment is chosen prior to the negotiation stage. We show that a player optimally chooses an intermediate degree of irrevocability provided the costs of increasing the degree of commitment are small enough. In this case, not only an immediate agreement is reached but also the commitment is effective.Received: 18 July 2002, Revised: 20 March 2003, JEL Classification Numbers: C78.Part of this work was written while I was visiting the IAE-CSIC and the University of Essex, whose hospitalities are gratefully acknowledged. This paper has benefited from comments of seminar participants at the University of Essex, 56th European Econometric Society Meeting, 16th Annual Congress of the European Economic Association in Lausanne and the XXVI Symposium of Economic Analysis in Barcelona. I thank Vicent Calabuig and Gonzalo Olcina for very helpful comments. I am especially indebted t o Clara Ponsatí and an anonymous referee for some very detailed comments which lead to substantial improvement of the paper. I also gratefully acknowledge the financial support from Generalitat Valenciana under a postdoctoral grant.     

Modeling corner solutions with panel data: Application to the industrial energy demand in France

This paper provides an empirical application of Lee and Pitts (1986) approach to the problem of corner solutions in the case of panel data. This model deals with corner solutions in a manner consistent with the firm behavior theory while controlling for unobserved heterogeneity. In this model, energy demand at industrial plant level is the result of a discrete choice of the type of the energy to be consumed and a continuous choice that defines the level of demand. The econometric model is, essentially, an endogenous switching regime model which requires the evaluation of multivariate probability integrals. We estimate the random effect model by maximum likelihood using a panel of industrial French plants from the paper and pulp industry. We calculate empirical price elasticities of energy demand from the model. We also study the effects on energy demand of an environmental policy aimed at reducing CO₂ emissions. The authors are grateful to the Institut Français de eEnergie for its financial support and to the SESSI for providing the data. We would like to thank two anonymous referees for useful comments and suggestions. the usual disclaimer applies.     

Bid Design Effects in Multiple Bounded Discrete Choice Contingent Valuation

A potential concern in multiple bounded discrete choice contingent valuation surveys – where the respondent is asked to express voting certainty, rather than a simple yes or no, on a large number of payment amounts (bids) – is whether responses are influenced by the particular position of bids in the bid-voting panel rather than solely on the respondents willingness to pay (WTP). For instance, respondents may systematically state they would pay the first few bid amounts and not pay all subsequent bids – regardless of the actual dollar values. Such systematic bid design effects would suggest that this method does not provide a valid measure of WTP. Using a split-sample survey, we compare responses to three different bid arrays that have an identical minimum bid, maximum bid, and number of bids. Using nonparametric estimation techniques, we find that estimated WTP distributions and corresponding welfare measures are not statistically different across survey samples.     

Endogenous monetary policy and the liquidity effect

We compare the transmission mechanism of exogenous and endogenous monetary policies in a calibrated small open economy model with nominal and real rigidities. Under an exogenous monetary policy rule it takes implausible values of the intertemporal elasticity of substitution and the price adjustment costs to generate the liquidity and overshooting effects. Endogenous rules with strong feedback to inflation and output help to reproduce the response of the nominal interest and exchange rates to unanticipated monetary policy shocks that characterize the transmission mechanism of standard sticky price models. The liquidty and overshooting effects are always obtained when the model is augmented with a Taylor interest rate rule.JEL Classification: E32, E43Javier Andrés acknowledges support of CICYT grant SEC2002-0026. We thank the comments of two anonymous referees and the editor, Jordi Caballé, to an earlier version of the paper. The views expressed here are those of the authors and do not represent the view of the Banco de España.