Comparative Static Implications Research Articles

Working alone and working with others: implications for the malthusian era

This paper presents a stylized dynamic model to study the impact of the social organization of production during the Malthusian Era (after the Neolithic Age and before the Industrial Revolution), during which there was little or no economic growth. The focus is on the division of time between working alone (individualism) and working with others (collectivism). This division of time matters because individuals have different productive abilities. A greater fraction of time spent working with others raises the income of current Low-ability individuals—but it may also lower the income of High-ability individuals and hence lower the bequests they leave for future Low-ability individuals. In the presence of congestion effects, these forces interact in a very complicated way. The paper analyzes the comparative statics implications of this division of time on economic outcomes in the (unique, non-degenerate) Malthusian steady state. It finds that a greater fraction of time spent working with others (a greater degree of collectivism) leads to a larger population, smaller per capita income, and lower income inequality. Some historical evidence is consistent with these predictions.

DIRECTIONAND INTENSITYOF RISK PREFERENCEATTHE THIRD ORDER

ABSTRACTIn expected utility theory, aversion to risk, greater aversion, and the desire to substitute away from risk are each characterized by properties of the Arrow–Pratt index of absolute risk aversion, with comparative statics implications for such decisions as saving. At the third order, however, no single index suffices. We contrast alternative indices of third‐order risk preference and show that the substitution effect of downside risk is governed by the Schwarzian, and that where the degree of prudence governs the magnitude of precautionary saving, the Schwarzian governs the effect of background risk on the marginal rate of time preference.

A Model of Capital Structure Under Labor Market Search

This paper develops a competitive search equilibrium model of capital structure and labor outcomes. In the model, employers design capital structures and compete for workers subject to idiosyncratic productivity shocks and labor search frictions. The capital structure policy reflects the trade-off between the strategic benefit of debt in wage bargaining and the cost of debt in labor hiring. The model generates rich comparative static implications regarding the impacts of productivity, credit and labor market factors on leverage and labor outcomes. A calibration yields a large wage dispersion and a highly elastic labor market tightness with respect to productivity.

A preliminary theoretical examination of the targeted public distribution system in India

A theoretical model of targeting in the public distribution system is set out. In any system of targeting there could be inclusion and exclusion errors. These errors could be reduced by search by the state. The state aims to minimise the costs of food administration subject to keeping the magnitude of the exclusion error bounded. Targeting involves a consideration of the objective poverty level, the official poverty level and the targeted poverty level by the state. The targeted poverty level could be less than the official poverty level if the extent of search is not adequate. The objective poverty level is an increasing function of the above poverty line issue price of food due to exclusion errors, a decreasing function of the procurement price of food and by definition the below poverty line issue price of food. The instruments in the hands of the state are the official poverty level, the above poverty line issue price for food, the procurement price of food and the extent of search. The comparative static implications of the model are set out.

Why Myths in Neoclassical Economics Threaten the World Economy: A Post-Keynesian Manifesto

There is a myth underlying neoclassical economic analysis of a 'Western' economy, which is that in anything but the relatively short run, defined as the length of a business cycle, the economy reaches an equilibrium position determined entirely by supply side factors and unaffected by measures taken to increase aggregate demand during a slump. This myth is not based on any factual analysis, it is simply assumed. It threatens the wellbeing of the world economy because it allows those who hold it to deny there is any need to change the deregulated state of the international financial sector, that caused the global crisis which started in 2007 and the effects of which have persisted ever since. The fundamental myth has a number of corollaries, which are worth calling associated myths. One of the most important is that the composition of spending to increase aggregate demand during a slump is irrelevant, so that it does not matter if the spending is directed towards consumer goods or to increasing physical and human capital. Another is that monetary policy has a more desirable impact on the economy than does fiscal policy. The paper focuses on neo-classical growth theory; comparative static implications are not considered. Finally, the policy implications are discussed.

Campaign allocations under probabilistic voting

We develop a probabilistic voting model where candidates compete by advertising in different media markets. Ads are viewed by everyone within a market and cannot be targeted to subgroups such as one candidate’s partisans. Candidates estimate the distribution of voter preference intensities in a market, and campaign ads then shift this distribution. Individuals with any intensity vote with some probability for each candidate. We derive comparative static implications of changes in a variety of factors on the advertising decisions of each candidate. Using campaign advertising data from 2002, we find these results to be consistent with actual campaign allocation behavior.

Currency Crisis and Stabilization Programme: A Third Generation Approach

A central accompanying feature of financial market liberalization under fully convertible currency was unusual number of severe financial crisis. However, the recent episode of East Asian crisis is considered to be distinctive in several respects. First, it appears to be the first genuinely global financial crisis to hit emerging market economies. Secondly, the Asian crisis appears to be more deeply rooted in financial imbalances in private sector than in the public sector financial problems that characterized the 1980s debt crisis and the Mexican 1994-95 crisis. Thirdly, the crisis involves increasingly dramatic effects. Measured in terms of bank and firm defaults, the costs are enormous. Measured in terms of output and employment loss, the costs are even more frightening. These features of Asian crisis make the third generation approach a relevant framework of analysis. This paper takes credit view of currency crisis as point of departure. In section I we have examined emergence of currency crisis due to rise in risk premium and focused on the macroeconomic adjustment in response to fiscal policy and monetary policy in a hyperdepreciation-led situation of currency crisis under static expectation. We have introduced rational expectation regarding expected depreciation in section II. We have attempted a rational expectation formalization of Krugman's model (2003) so as to focus on comparative static implications of monetary and fiscal policies in the post-crisis situation.

Compensating for the winner's curse: Experimental evidence

We conduct experiments on common value auctions with rationing. In each auction, the good is randomly allocated to one of the k highest bidders, at the ( k + 1 ) st highest price. When k > 1 , bidders are rationed. As the degree of rationing increases, the equilibrium bid function increases. Consistent with prior literature, we find that bidders suffer from the winner's curse and lose money on average. However, bids in the experiments do adjust in the appropriate direction as the degree of rationing changes, providing support for the comparative statics implications of the theory. Our results are consistent with subjects having an intuitive understanding of the winner's curse, but being unable to compute the equilibrium bid levels.

Information Dispersion and Auction Prices

This paper derives comparative static implications of Nash equilibrium bidding in a mineral rights model of auctions. It then tests these implications to assess whether a model of Nash equilibrium behavior in a CV information structure characterizes eBay online computer auctions. Market data is augmented by survey data in order to determine the information structure and bidding behavior in these auctions. This external information permits joint identi…cation of Nash bidding behavior and common values. By imposing structure on the measurement error in my survey data, I am able = =

Experimentation, full revelation, and the monotone likelihood ratio property

We consider a simple two-period experimentation model and explore some comparative statics implications of failures in the monotone likelihood ratio property (MLRP). A canonical example of a non-MLRP noise density is a U-shaped density on a bounded interval. In that case, the optimal first period action and information at the optimum are non-monotonic in the volatility of noise. Furthermore, there may be discontinuities in the optimal action with respect to changes in the volatility of noise and other parameters, in which the agent switches back and forth between a low, non-fully-revealing action and a high, fully-revealing action.

Winner's Curse: Theory and Experiments

We conduct experiments on common value auctions with rationing. In each auction, the good is randomly allocated to each of the k highest bidders, at the (k+1)st highest price. As the degree of rationing increases, the theoretical winner's curse decreases, and the equilibrium bid function increases. Experimentally, we find that bidders suffer from the winner's curse, and lose money on average. However, the bids in the experiments do adjust in the appropriate direction as the degree of rationing changes, providing support for the comparative statics implications of the theory. We demonstrate the connection between the experimental results and a theoretical measure of the winner's curse. Our results are consistent with subjects having an intuitive understanding of the winner's curse, but being unable to compute the equilibrium bid levels.

Mean‐Variance Preferences and Investor Behaviour

We study the comparative statics implications of mean-variance preferences for optimal portfolios. Specifically, we show that all risk-averse mean-variance investors raise their investment in a risky asset in response to a change in that asset's return distribution if and only if the change lowers both the mean and standard deviation of the return by the same percentage. Besides being of interest in its own right, our results allow us to compare some comparative statics implications and the expected utility and mean-variance models systematically.

Mean-Variance Preferences and Investor Behavior

We study the comparative statics implications of mean-variance preferences for optimal portfolios. Specifically, we show that all risk averse mean-variance investors raise their investment in a risky asset in response to a change in that asset's return distribution if and only if the change lowers both the mean and standard-deviation of the return by the same percentage. Thus, raising the mean while keeping the standard deviation constant or lowering the standard deviation while keeping the mean constant will not increase investment for all mean-variance investors. If, however, we truncate the distribution from above in such a way that the mean and standard deviation fall by the same percentage, then investment does increase for all risk averse mean-variance investors. Besides being of interest in its own right, our result allows us to compare the comparative statics implications of the expected utility and mean-variance models systematically.

Real Estate Brokers, Nonprice Competition and the Housing Market

Given a fixed commission rate and easy entry, economic profits must be competed away on some nonprice margin in the real estate brokerage market. This paper focuses on nonprice competition in the level or quality of services offered buyers and sellers in the market, examining the equilibrium adjustment process, comparative static predictions and efficiency implications. In contrast with earlier studies focusing on wasteful advertising, this paper demonstrates that higher commission rates can either increase or decrease deadweight loss, depending upon how broker services affect buyer and seller transaction costs.

Comparative statics of a signaling game: An experimental study

In this paper a simple and basic signaling game is studied in an experimental environment. First, we check whether we can replicate some of the findings in the literature concerning equilibrium selection and the use and impact of costly signals. Second, and foremost, the comparative statics implications of the game are studied. The experimental results are related to the predictions of two competing behavioral models: a game model, in which subjects are assumed to behave in line with (refined) sequential equilibrium theory, and a decision model, in which subjects are assumed to behave as non-strategic decision makers. The experimental outcomes replicate the finding in the literature that costly messages are sent more frequently by ‘higher’ sender types (whose information is such that persuasion is also profitable to the responder), and that such messages have an impact on the behavior of the responder. These results are consistent with (versions of) both the game model and the decision model. The comparative statics results, however, clearly point in the direction of the decision model. Play is most strongly affected by ‘own’ payoff parameters, as predicted by the decision model, and less so by opponent's payoff parameters, as predicted by the mixed strategies of the refined sequential equilibrium. Particularly, a decision model in which players are assumed to adapt beliefs about opponents' choice probabilities in response to experience in previous play, appears to succeed best in organizing the data.

Coalitions in congressional voting

Scholars of Congress generally agree on four points concerning roll-call votes. First, roll-call votes are important to members of Congress who care about reelection, public policies or both. Second, members have neither sufficient resources nor incentives to acquire, process and interpret information about the content and consequences of hundreds of roll-call votes considered on the floor each year.1 Third, insufficient resources and incentives induce members to apply simple decision rules on most votes. Fourth, a voting model should conform to the choices members make under uncertainty. 2 The scholars, however, differ in their specification of the simple rules members adopt. Familiar specifications include voting decisions rooted in two- or three-party alignments; one or more policy dimensions; self-interest or ideology; and cue taking) To varying degrees, most command an intuitive appeal and empirical support. Clearly, it is important to evaluate each model based on its (a) refutable implications, or (b) performance relative to the competing models. To test a unidimensional voting model, in which members vote based on an imprecise perception of the issues involved, 4 this paper adopts the first approach: it seeks to refute a pair of comparative static implications of the model. Two reasons account for the adoption of approach (a) and not (b). First, to the extent feasible, a comparison of the unidimensional model with the competing voting models appears in Poole and Rosenthal (1985a, 1985b). Second, the likelihood-ration test, considered to be statistically unambiguous, requires that competing models generate a nested set of hypotheses (see Amemiya, 1981). Unfortunately, models of roll-call voting, with substantially different origins, 5 seldom meet this requirement.

A pilot experimental study of the dynamic competitive firm under spot price uncertainty

This paper reports on a pilot experimental investigation into the behavior of the dynamic perfectly competitive firm under spot price uncertainty. However, in a sense that will become clearer as the paper unfolds, the firm is not the focus of interest, but rather the dynamic behavior of individuals in an uncertain world. The firm is the vehicle for my analysis. This analysis follows from an investigation similarly designed to discover how individuals take dynamic decisions under uncertainty, but using the household’s consumption/savings decision as the vehicle. This analysis(*) resulted in a number of important findings. The most significant of these were: first, that actual behavior differed significantly from the optimal behavior prescribed by the relevant economic theory; second, and perhaps in contrast, that the comparative static implications of actual behavior agreed with the comparative static properties of the optimal strategy. In other words, the individuals in our experiments behaved in a manner that was absolutely wrong but comparatively correct. Reactions to these findings have been varied. The most common re-

Agency theory: A falsificationist perspective

The purpose of this paper is to examine the empirical testability of agency theory from a falsificationist perspective. Following a brief discussion of economic methodology, the paper examines three main classes of agency models with a view to identifying the scope for empirical testing. With regard to the basic single period agency model, the paper argues that empirical researchers should direct their attention to generating and testing the comparative static implications of the model. For agency models with post-decision information, it is argued that the scope for empirical testing is likely to be severely limited by the researcher's inability to validate the truth value of the auxiliary hypotheses needed to generate empirically interesting implications. In addition, it is argued that considerable care needs to be exercised when interpreting the results of tests of “if and only if” propositions. These difficulties of interpretation are illustrated by reference to two recent attempts to test Holmstrom's theory of relative performance evaluation. Finally, it is argued that agency models involving pre-decision information are practically devoid of empirical content.

Signaling in Credit Markets

In this paper we show that, under a variety of alternative assumptions about the private information of loan applicants, a competitive market for loans is characterized by screening. Banks separate out loan risks by offering higher loans at higher interest rates. Depending on the nature of the informational asymmetry, it may be that applicants with less risky projects select larger rather than smaller loans. Comparative statics implications are also examined. In particular, we explore the effects of an increase in banks' cost of funds on average loan quality.

Bargaining with Two-sided Incomplete Information: An Infinite Horizon Model with Alternating Offers

This paper examines an infinite horizon bargaining model, incorporating five features: two-sided incomplete information (with potentially information-revealing strategies), an infinite horizon, uncertainty concerning the potential gains from trade, an illumination of interesting qualitative bargaining issues, and plausible (free from arbitrarily specified out-of-equilibrium conjectures) equilibria. These features, motivated in the paper, have powerful implications. A Nash equilibrium exists, and is generically both unique and sequential. Comparative static implications of variations in the game's specifications are developed. We find that natural indications of bargaining strength emerge from the model, and establish the intuitive result that an increase in a player's relative bargaining strength makes that player more likely to capture the gains from bargaining.