Purification of incentive compatible allocations

In implementation theory it is common to consider social choice functions that map to lotteries over outcomes. For example, virtual implementation has been used widely with social choice functions that involve randomization. This paper investigates (in incomplete information environments) the possibility of purification of such social choice functions, where purification means that the “replacement” social choice function maps to outcomes rather than distributions over outcomes, is incentive compatible and generates the same distribution over payoffs and outcomes as the original social choice function. Received: July 31, 2000; revised version: December 2, 2002 RID="*" ID="*" Thanks are due to Ole Nielsen, Terence Tao and Lin Zhou for helpful conversations. Thanks are also due to an anonymous referee for detailed comments.     

Cooperation through imitation

This paper characterizes long-run outcomes for broad classes of symmetric games, when players select actions on the basis of average historical performance. Received wisdom suggests that when agent's interests are partially opposed, behavior is excessively competitive: “keeping up with the Jones' ” lowers everyones' welfare. Here, we study the long-run consequences of imitative behavior when agents have sufficiently long memories and evaluate past actions in terms of (weighted) average payoff. Imitation robustly leads to cooperative outcomes (with highest symmetric payoffs) in the long run. Furthermore, lengthening memory reinforces this effect. This provides a rationale, for example, for collusive cartel-like behavior without collusive intent.     

The folk theorem revisited

Summary. This paper develops a simple instant-response model of strategic behavior where players can react instantly to changing circumstances, but at the same time face some inertia after changing action. The framework is used to reconsider the folk theorem and, in particular, the role of the key condition of dimensionality. In contrast to the discounted case in discrete time, here low dimensionality may help support equilibria because it is more difficult for a potential deviator or punisher to defect beneficially.Received: 20 November 2003, Revised: 1 November 2004, JEL Classification Numbers: C72, C73.Thanks are due to an anonymous referee for detailed comments.     

Interest Rates, Exchange Rates and Present Value Models of the Current Account

This paper develops a testable intertemporal model of the current account that allows for variable interest rates and exchange rates. These additional variables are channels through which external shocks may influence the domestic current account. The restrictions from the theoretical model are subjected to present value tests using quarterly data from three small open economies. The paper finds that including the interest rate and exchange rate improves the fit of the intertemporal model over what was found in previous studies. The model predictions better replicate the volatility of current account data and better explain historical episodes of current account imbalance.     

Comparative Learning Dynamics*

We study economic environments in which agents make choices on the basis of relative performance criteria and call the associated class of dynamic adjustment rules comparative dynamics. We distinguish two classes of learning behavior: learning from the population experience (imitative dynamics) and learning only from one's own experience (introspective dynamics). Paradoxically, for a broad class of models, comparing stochastically stable states across dynamics, agent payoffs are lower for imitative than introspective dynamics—mimicking best practice in the population is counterproductive.     

A Model of Endogenous Nontradability and its Implications for the Current Account*

This paper studies how nontraded goods limit the ability of a country to finance current account deficits. It uses an intertemporal model of the current account for a small open economy where goods are endogenously nontraded due to explicit trade costs. The economy has an endowment of two goods with differing trade costs, either of which can be traded or nontraded in equilibrium. The model implies that current account deficits impose a cost, in the form of raising the effective interest rate in the country. The findings differ from some recent studies: first, in that the interest rate rises even for countries with modest current account deficits; secondly, the interest rate cost eventually reaches an upper bound as current account deficits grow, and progressively more nontraded goods become traded to service the debt. Panel regression analysis of interest rate and current account data is consistent with our conclusions.     

Anonymous sequential games with aggregate uncertainty

In this paper we extend a result of Jovanovic and Rosenthal (Anonymous sequential games, Journal of Mathematical Economics 17, 1988) on the existence of equilibrium in Anonymous Sequential Games. Jovanovic and Rosenthal prove existence in the case where the aggregate distribution of agents' characteristics evolves nonstochastically - the case of ‘no aggregate uncertainty’. Here we show how aggregate uncertainty can be introduced into the model (so the aggregate distribution evolves stochastically) and extend the Jovanovic-Rosenthal existence theorem to this case.     

Extensive Form Implementation in Incomplete Information Environments

We study the implementation of social choice rules in incomplete information environments. A sufficiency condition calledposterior reversalis given for extensive form implementation. The condition has a natural interpretation in signaling terms: Consistent posterior distributions under truth-telling are different from consistent posteriors under deception. This variation in the distribution over player types leads to variation in the distribution over actions and outcomes (comparing truth-telling and deception). We exploit this feature to implement social choice rules.Journal of Economic LiteratureClassification Numbers: D78, D82.     

The extensive margin and monetary policy

The creation of new firms, referred to as the extensive margin, is a significant but overlooked dimension of monetary policy. A monetary VAR documents that monetary policy has significant effects on firm creation. An analytically tractable model combining sticky prices and firm entry shows that entry alters the transmission of monetary policy innovations, acting much like a type of investment in more standard models. Monetary policy rules that offset the uncertainty of productivity shocks can raise the mean level of entry and thereby welfare, suggesting a new motivation for stabilization policy.     

Endogenous tradability and some macroeconomic implications

While nontraded goods play an important role in many open economy macroeconomic models, these models have difficulty explaining the low volatility in the relative price of nontraded goods. In contrast to macroeconomic convention, this paper argues that the share of nontraded goods is endogenous, a time-varying product of macroeconomic shocks and trade costs that are heterogeneous across goods. A simple open economy model demonstrates that trade cost heterogeneity and a time-varying margin of tradedness dramatically reduces the volatility of nontraded prices. This also reduces the ability of real exchange rate adjustments to dampen current account imbalances.