Int Econ Rev Research Articles

Reallocation with priorities and minimal envy mechanisms

We investigate the problem of reallocation with priorities where one has to assign objects or positions to individuals. Agents can have an initial ownership over an object. Each object has a priority ordering over the agents. In this framework, there is no mechanism that is both individually rational (IR) and stable, i.e. has no blocking pairs. Given this impossibility, an alternative approach is to compare mechanisms based on the blocking pairs they generate. A mechanism has minimal envy within a set of mechanisms if there is no other mechanism in the set that always leads to a set of blocking pairs included in the one of the former mechanism. Our main result shows that the modified Deferred Acceptance mechanism (Guillen and Kesten in Int Econ Rev 53(3):1027–1046, 2012), is a minimal envy mechanism in the set of IR and strategy-proof mechanisms. We also show that an extension of the Top Trading Cycle (Karakaya et al. in J Econ Theory 184:104948, 2019) mechanism is a minimal envy mechanism in the set of IR, strategy-proof and Pareto-efficient mechanisms. These two results extend the existing ones in school choice.

New results on precautionary saving and nonlinear risks.

We study precautionary saving in a two-period model that allows for nonlinear risks and nonseparable preferences. Permitting nonlinear risk effects is important because they are common in the developing world or when worldwide shocks hit economies, like the COVID-19 pandemic. Allowing nonseparable preferences is also important because they admit the incorporation of intergenerational transfer, habit persistence and other specific features of intertemporal decision making. We decompose the risk shock using Davis’s (Int Econ Rev 30(1):131–136, 1989) compensation method and analyze the income and substitution effect of an increase in risk. We prove that the substitution effect is always negative and, therefore, the income effect must be positive and larger in size to have a precautionary net effect. We then apply the method to various sources of risk, such as income, interest rate and wealth risk. We analyze the magnitude of each effect and find the conditions required to guarantee precautionary saving in each case. Our results are presented as signs of covariances, which provides a new perspective on precautionary saving.

Afriat and arbitrage

This paper presents a proof of Afriat’s (Int Econ Rev 8:67–77) theorem on revealed preference by using the idea that a rational consumer should not be vulnerable to arbitrage. The main mathematical tool is the separating hyperplane theorem.

Some new results on generalized additive games

A Generalized Additive Game (GAG) (Cesari et al. in Int J Game Theory 46(4):919–939, 2017) is a Transferable Utility (TU) game (N, v), where each player in N is provided with an individual value, and the worth v(S) of a coalition \(S \subseteq N\) is obtained as the sum of the individual values of players in another subset \(\mathcal {M}(S)\subseteq N\). Based on conditions on the map \(\mathcal {M}\) (which associates to each coalition S a set of beneficial players \(\mathcal {M}(S)\) not necessarily included in S), in this paper we characterize classes of GAGs that satisfy properties like monotonicity, superadditivity, (total) balancedness, PMAS-admissibility and supermodularity, for all nonnegative vectors of individual values. We also illustrate the application of such conditions on \(\mathcal {M}\) over particular GAGs studied in the literature (e.g., glove games (Shapley and Shubik in Int Econ Rev 10:337–362, 1969), generalized airport games (Norde et al. in Eur J Oper Res 136(3):635–654, 2002), fixed tree games (Bjørndal et al. in Math Methods Oper Res 59(2):249–270, 2004), link-connection games (Moretti in Multi-agent systems and agreement technologies, vol 10767. Springer, Cham, 2008; Nagamochi et al. in Math Oper Res 22(1):146–164, 1997), simple minimum cost spanning tree games (Norde et al. in Eur J Oper Res 154(1):84–97, 2004; Tijs et al. in Eur J Oper Res 175(1):121–134, 2006) and graph coloring games (Deng et al. in Math Program 87(3):441–452, 2000; Hamers et al. in Math Program 145(1–2):509–529, 2014)).

On the characterizations of viable proposals

Sengupta and Sengupta (Int Econ Rev 35:347–359, 1994) consider a payoff configuration of a TU game as a viable proposal if it challenges each legitimate contender. Lauwers (Int Econ Rev 43:1369–1371, 2002) prove that the set of viable proposals is nonempty for every game. In the present paper, we prove that the set of viable proposals coincides with the coalition structure core if there exists an undominated proposal; otherwise, it coincides with the set of accessible proposals. This characterization result implies that a proposal is a viable proposal if and only if it is undominated or accessible. Moreover, we prove that the set of viable proposals includes the minimal dominant set, which is another nonempty extension of the coalition structure core introduced by Koczy and Lauwers (Games Econ Behav 61:277–298, 2007). In particular, we prove that the set of viable proposals of a cohesive game coincides with the minimal dominant set.

Divergence and convergence in Scarf cycle environments: experiments and predictability in the dynamics of general equilibrium systems

Previous experimental work demonstrates the power of classical theories of economic dynamics to accurately characterize equilibration in multiple market systems. Building on the literature, this study examines the behavior of experimental continuous double auction markets in convergence-challenging environments identified by Scarf (Int Econ Rev 1:157–171, 1960) and Hirota (Int Econ Rev 22:461–467, 1981). The experiments provide insight into two important economic questions: (a) Do markets necessarily converge to a unique interior equilibrium? and (b) which model, among a set of classical specifications, most accurately characterizes observed price dynamics? We observe excess demand-driven prices spiraling outwardly away from the interior equilibrium prices as predicted by the theory of disequilibrium price dynamics. We estimate a structural model establishing that partial equilibrium dynamics characterize price changes even in an unstable general equilibrium environment. We observe linkages between excess demand in one market and price changes in another market, but the sign of expected price change in a market does not depend on the magnitude of excess demand in other markets unless disequilibrium is severe.

Probabilistic independence axiom

One of the most well-known theories of decision making under risk is expected utility theory based on the independence axiom. The independence axiom postulates that decision maker’s preferences between two lotteries are not affected by mixing both lotteries with the same third lottery (in identical proportions). The probabilistic independence axiom (also known as the cancelation axiom) extends this classic independence axiom to situations when a decision maker chooses in a probabilistic manner (i.e., she does not necessarily prefer the same choice alternative when repeatedly presented with the same choice set). Probabilistic choice may occur for a variety of reasons such as unobserved attributes of choice alternatives, imprecision of preferences, random errors/noise in decisions. According to probabilistic independence axiom, the probability that a decision maker chooses one lottery over another does not change when both lotteries are mixed with the same third lottery (in identical proportions). This paper presents a model of probabilistic binary choice under risk based on this probabilistic independence axiom. The presented model generalizes an incremental expected utility advantage model of Fishburn (Int Econ Rev 19(3):633–646, 1978) and stronger utility model of Blavatskyy (Theory Decis 76(2):265–286, 2014).

Dynamics of the European sovereign bonds and the identification of crisis periods

We develop an empirical model of heterogeneous agents to study the dynamics of the European sovereign bonds market. Agents make use of different information from the CDS market and historical price movements of the sovereign bonds for their trading decisions. Subject to the perceived sovereign risk, agents exhibit changing trading behaviors in high-risk periods and tranquil times. To compare the ability of our model to identify crises periods, we also run a generalized sup ADF test as suggested in Phillips et al. (Int Econ Rev 56(4):1043–1078, 2015). Our results indicate that the smooth transition regression framework may provide additional valuable information regarding the timing of crisis events.

The role of matching grants as a commitment device in the federation model with a repeated soft budget setting

This paper revisits the soft budget versus the hard budget constraint in federations. By extending Besfamille and Lockwood (Int Econ Rev 49:577–593, 2008), who examine a case where the soft budget is ex ante favorable, we consider a model that allows the federal government to use a matching grant as an ex post policy instrument. We establish that this instrument acts as a commitment device and may improve social welfare compared with the situation in which the government’s ex ante policy options are limited to a hard or soft budget.

Identification of multiple stock bubbles in an emerging market: application of GSADF approach

This paper aims at to investigate the existence of multiple bubbles and specific corresponding events in Pakistan Stock Exchange across different industrial sectors using Generalized Sup Augmented Dickey Fuller (GSADF) test of right-tailed ADF as proposed by Philips et al. (Int Econ Rev 56:1043–1078, 2015a, Int Econ Rev 56:1079–1134, 2015b) by using monthly data for the period of 2007–2016. Findings of study confirm the existence of multiple bubbles in KSE-100 Index along with different industrial sectors. Empirical results depict that Investments, Chemicals and Textile Spinning were the only few sectors where no stock price bubbles were identified. The present study is expected to be pioneer in its nature to apply GSADF for the identification of multiple stock bubbles in emerging stock market of Pakistan which can be further used for comparison of stock bubbles in other regional markets such as BRICS or SAARC regions in order to find out the similarities and dissimilarities in the events causing stock market bubbles.

An elementary model of export tax war

In this paper, the author uses a generalized version of Kennan and Riezman (Int Econ Rev 29(1):81–85, 1988) trade war model with Stone–Geary preferences, where countries can choose between a Nash tariff or an export tax. Three scenarios emerge from this setting, namely: the standard tariff war, the export tax war and a mixed scenario—“the tariff-export tax war”—where one country applies a Nash tariff, while the other imposes an export tax. In this setting, countries derive their market power not only from their relative endowment size, but also from their subsistence consumptions. As a consequence, a large country does not necessarily win a trade war if it has a substantially higher consumption requirement than the small country. This finding explains why large economies sign trade agreements with small counterparts that prohibit the use of tariffs and export taxes.

Optimal fertility under age-dependent labour productivity

In the so-called Rapport Sauvy (1962), the French demographer Alfred Sauvy argued that Wallonia’s fertility rate was socially suboptimal, and recommended a 20 % rise of fertility, on the grounds that a society with too low a fertility leads to a low-productive economy composed of old workers having old ideas. This paper examines how Sauvy’s intuition can be incorporated in the Samuelsonian optimal fertility model (Samuelson, Int Econ Rev 16:531–538, 1975). We build a four-period OLG model with physical capital and with two generations of workers (young and old), the skills of the latter being subject to some form of decay. We characterize the optimal fertility rate and show that this equalizes, at the margin, the sum of the capital dilution effect (Solow effect) and the labour age-composition effect (Sauvy effect) with the intergenerational redistribution effect (Samuelson effect). Numerical simulations show that it is hard, from a quantitative perspective, to reconcile Sauvy’s recommendation with facts. This leads us to examine other potential determinants of optimal fertility, by introducing technological progress and a more general social welfare function.

Gender wage inequalities in Switzerland: the public versus the private sector

Wage differences between women and men can be divided into an explained part and an unexplained part. The former encompasses differences in the observable characteristics of the members of groups, such as age, education or work experience. The latter includes the part of the difference that is not attributable to objective factors and represents an estimation of the discrimination level. We discuss the original method of Blinder (J Hum Resour 8(4):436–455, 1973) and Oaxaca (Int Econ Rev 14(3):693–709, 1973), the reweighting technique of DiNardo et al. (Econometrica 64(5):1001–1044, 1996) and our approach based on calibration. Using a Swiss dataset from 2012, we compare the estimated explained and unexplained parts of the difference in average wages in the private and public sectors obtained with the three methods. We show that for the private sector, all three methods yield similar results. For the public sector, the reweighting technique estimates a lower value of the unexplained part than the other two methods. The calibration approach and the reweighting technique allow us to estimate the explained and unexplained parts of the wage differences at points other than the mean. By using this, in this paper, the assumption that wages are more equitable in the public sector is analysed. Wage differences at different quantiles in both sectors are examined. We show that in the public sector, discrimination occurs quite uniformly both in lower and in higher-paying jobs. On the other hand, in the private sector, discrimination is greater in lower-paying jobs than in higher-paying jobs.queryPlease check and confirm the given name and family name is correctly identified for the first author and amend if necessary.

Is Foreign Technological Advance Harmful in the Melitz Model?

Foreign technological advance unambiguously reduces home welfare in a popular variant of the Melitz (Econometrica 71(6):1695–1725, 2003) model that assumes the presence of a costlessly traded homogeneous (outside) good (Demidova in Int Econ Rev 49(4):1437–1462, 2008). The present paper shows that this result is sensitive to the presence of the outside good and is, in fact, reversed in its absence: foreign technological advance always improves home welfare in the Melitz model without the outside good. Improvement in home welfare occurs via changes in the numbers and prices of domestic and imported varieties. For quantitative analysis of welfare effects, we calibrate an international trade model for the United States and its major trading partners. US is found to gain less from foreign technological improvements than its trading partners from US improvements. In either case, the magnitude of gains is modest.

Gorman revisited: nonparametric conditions for exact linear aggregation.

In the tradition of Afriat (Int Econ Rev 8:67–77, 1967), Diewert (Rev Econ Stud 40:419–425, 1973) and Varian (Econometrica 50:945–972, 1982), we provide a revealed preference characterisation of exact linear aggregation. This guarantees that aggregate demand can be written as a function of prices and aggregate income alone, while abstracting from income-distributional aspects. We also establish nonparametric conditions for individual consumption to be representable in terms of Gorman Polar Form preferences. Our results are simple and complement those of Gorman (1953, 1961). We illustrate the practical usefulness of our results by means of an empirical application to a Spanish balanced microdata panel. We find strong evidence against the existence of a limited set of representative agents, which in turn seems to empirically support the need for (macroeconomic) models using a continuum of heterogeneous agents.

“How powerful is demography? The serendipity theorem revisited” comment on De la Croix et al. (2012)

Samuelson’s (Int Econ Rev 16(3):531-538, 1975) serendipity theorem states that the “goldenest golden rule” steady-state equilibrium can be obtained by a competitive two-period overlapping generation economy with capital accumulation, provided that the optimal growth rate prevails. De la Croix et al. (J Popul Econ 25:899-922, 2012) extended the scope of the theorem by showing that it also holds for risky lifetime. With this note, we introduce medical expenditure as a determinant of the probability of surviving to old age to prove the theorem. The original as well as all extended versions of the serendipity theorem, however, fail to prove that second-order conditions are satisfied in general. Still, unlike De la Croix et al. (J Popul Econ 25:899-922, 2012), we can exclude the existence of corner solutions where the probability of reaching old age is zero or one. The zero survival probability case becomes irrelevant if the option to randomize between death and life utility is taken into account. Survival with certainty is ruled out if the marginal cost of survival is increasing. Hence, the optimal survival probability represents an interior solution. Furthermore, we show for the optimal survival probability that the value of a statistical life is positive and equal to its marginal cost.

Testing explosive behavior in the gold market

This paper examines the explosive behavior in the gold market. Using the generalized sup ADF (GSADF) test introduced by Phillips et al. (Testing for multiple bubbles. Cowles Foundation Discussion Paper No. 1843, 2012), we quantitatively examine the existence of explosive periods in the gold market during the period between 1968 and 2013. The date-stamping strategy associated with the test provides a real-time estimation for the origination and termination dates of each explosive period in the gold market, and several explosive periods, including both the famous 1980 explosion and the most recent 2011 explosion, are identified. Our results also demonstrate that, when multiple explosive periods exist within a specific time interval, the GSADF test is more accurate and effective in detecting them than the approach introduced by Phillips et al. (Int Econ Rev 52(1):201–226, 2011), which is relatively conservative. This paper provides further evidence that gold is the safe haven for assets under huge risk and the gold price reacts to political and economic uncertainties relatively faster than other selected commodities do.

A Strategic Dynamic Programming Method for Studying Short-Memory Equilibria of Stochastic Games with Uncountable Number of States

We study a class of infinite horizon stochastic games with uncountable number of states. We first characterize the set of all (nonstationary) short-term (Markovian) equilibrium values by developing a new (Abreu et al. in Econometrica 58(5):1041–1063, 1990)-type procedure operating in function spaces. This (among others) proves Markov perfect Nash equilibrium (MPNE) existence. Moreover, we present techniques of MPNE value set approximation by a sequence of sets of discretized functions iterated on our approximated APS-type operator. This method is new and has some advantages as compared to Judd et al. (Econometrica 71(4):1239–1254, 2003), Feng et al. (Int Econ Rev 55(1):83–110, 2014), or Sleet and Yeltekin (Dyn Games Appl doi: 10.1007/s13235-015-0139-1 , 2015). We show applications of our approach to hyperbolic discounting games and dynamic games with strategic complementarities.

Estimating the Elasticity of Growth in the US Using the Generalized Means of Income

Economic growth has been a key mantra to promote poverty reduction in developing countries. Studies have shown that a 1 % GDP growth can reduce absolute poverty (or increase the average income of the poorest quintile) by 1 % or more in developing countries. The literature calls this relationship between poverty reduction and growth as growth elasticity. However, there is very little research available studying the extent of growth elasticity in a developed economy. I fill this vacuum in literature by applying the method of generalized means of income outlined in Foster and Szekely (Int Econ Rev 49(4):1143–1172, 2008) on micro-level data to estimate the elasticity of growth in the US. The generalized means of income of Foster and Szekely (Int Econ Rev 49(4):1143–1172, 2008) satisfies all the axioms of a good income standard, which makes it a preferred method to measure the elasticity of growth. My analysis shows that most of the growth in the US is driven by the richer segment of the society. The ‘wealthier’ poor get some benefit from growth—a 1 % increase in per-capita state-level income leads to about 0.9 % increase in their income both in the short and long-run. However, this relationship diminishes when I calculate the growth elasticity of those in deeper poverty. Sector-wise decomposition of income shows that the ‘wealthier’ poor benefits from an increase in the size of the service sector, but those in deeper poverty do not see this benefit.

Estimation of Panel Model with Spatial Autoregressive Error and Common Factors

This study explores the estimation of a panel model that combines multifactor error with spatial correlation. On the basis of common correlated effects pooled (CCEP) estimator (Pesaran in Econometrica 74:967---1012, 2006), the generalized moments (GM) procedure suggested by Kelejian and Prucha (Int Econ Rev 40:509---533, 1999) is employed to estimate the spatial autoregressive parameters. These estimators are then used to define feasible generalized least squares (FGLS) procedures for the regression parameters. Given N and T $$\longrightarrow \infty $$?? (jointly), this study provides formal large sample results on the consistency of the proposed GM procedures, as well as the consistency and asymptotic normality of the proposed feasible generalized least squares (FGLS). It is proved that FGLS is more efficient than CCEP. The small sample properties of the various estimators are investigated by Monte Carlo experiments, which confirmed the theoretical conclusions. Results demonstrate that the popular spatial correlation analysis used in previous empirical literature may be misleading because it neglects common factors.