Testable Implications Research Articles

Dynamic Pricing of Credit Cards and the Effects of Regulation

We construct a two-period model of revolving credit with asymmetric information and adverse selection. In the second period, lenders exploit an informational advantage with respect to their own customers. Those rents stimulate competition for customers in the first period. The informational advantage the current lender enjoys relative to its competitors determines interest rates, credit supply, and switching behavior. We evaluate the consequences of limiting the repricing of existing balances as implemented by recent legislation. Such restrictions increase deadweight losses and reduce ex ante consumer surplus. The model suggests novel approaches to identify empirically the effects of this law. We find the pattern of changes to interest rates and balance transfer activity before and after the CARD Act are consistent with the testable implications of the model.

Multinomial Logit Processes and Preference Discovery: Inside and Outside the Black Box

Abstract We provide two characterizations, one axiomatic and the other neuro-computational, of the dependence of choice probabilities on deadlines, within the widely used softmax representation $$\begin{align*} p_{t}\left( a,A\right) =\dfrac{e^{\frac{u\left( a\right) }{\lambda\left( t\right) }+\alpha\left( a\right) }}{\sum_{b\in A}e^{\frac{u\left( b\right) }{\lambda\left( t\right) }+\alpha\left( b\right) }}, \end{align*}$$ where $p_{t}\left( a,A\right)$ is the probability that alternative $a$ is selected from the set $A$ of feasible alternatives if $t$ is the time available to decide, $\lambda$ is a time-dependent noise parameter measuring the unit cost of information, $u$ is a time-independent utility function, and $\alpha$ is an alternative-specific bias that determines the initial choice probabilities (reflecting prior information and memory anchoring). Our axiomatic analysis provides a behavioural foundation of softmax (also known as Multinomial Logit Model when $\alpha$ is constant). Our neuro-computational derivation provides a biologically inspired algorithm that may explain the emergence of softmax in choice behaviour. Jointly, the two approaches provide a thorough understanding of softmaximization in terms of internal causes (neuro-physiological mechanisms) and external effects (testable implications).

Behavioral Foundations of Nested Stochastic Choice and Nested Logit

We provide the first behavioral characterization of nested logit, a foundational and widely applied discrete-choice model, through the introduction of a nonparametric version of nested logit that we call “nested stochastic choice” (NSC). NSC is characterized by a single axiom that weakens independence of irrelevant alternatives on the basis of revealed similarity to allow for the similarity effect. Nested logit is characterized by an additional menu-independence axiom. Our axiomatic characterization leads to a practical, data-driven algorithm that identifies the true nest structure from choice data. We also discuss limitations of generalizing nested logit by studying the testable implications of cross-nested logit.

A Systematic Review of Individual Differences in Perception, Action, and Decision Making: Implications for Dance Education.

This systematic bibliometric review summarizes recent neurocognitive research highlighting inter-individual differences in perception, action, and decision making that may have implications for dance education. First, the relevance of individual differences in cognitive functioning for dance education is illustrated by describing how a person's preferred reliance on certain perceptual, motor, or (meta) cognitive skills may be exploited in dance training. Subsequently, we describe the findings of a literature search conducted to identify cognitive neuroscientific publications between 2010 and 2021 that highlight individual differences in cognitive functions that were also found to be supported by structural or functional-connectivity differences in the central nervous system. To cluster the findings of the literature search, we propose a simplified, six-category information processing model. Finally, for each model category, we summarize recent representative findings on salient individual differences and tentatively formulate testable implications for dance education practice with regard to pedagogical and curricula adaptations. Finally, the review also delineates an agenda for lines of research of which the results hopefully will assist dance instructors in the future.

Match Outcome Uncertainty and Sports Fan Demand: An Agnostic Review and the Standard Economic Theory of ports Leagues

One of Rottenberg’s (1956, The baseball players’ labor market. Journal of Political Economy, 64, 242–258) foundational sports economics hypotheses is that fans prefer their team to win but with more match outcome uncertainty (MOU) rather than less. The testable implication is that increase in home team win chances and match ‘tightness’ should lead to increased fan demand for live attendance. It is safe to say that the verdict by those that voice one, especially recently, is that empirical results offer only occasional and weak support for Rottenberg’s hypothesis. We show that a more agnostic examination of the literature suggests that there is much more evidence failing to reject Rottenberg’s hypothesis than previously acknowledged. We also show that Rottenberg’s hypothesis is only one alternative generated by the standard economics of sports leagues. Rejecting Rottenberg’s hypothesis does not necessarily reject the importance of MOU with a different predicted sign as a demand determinant. This suggests additional testing tasks for the body of work that has moved on to loss aversion based on the prospect theory.

A Wake-Up Call Theory of Contagion

Abstract We offer a theory of financial contagion based on the information choice of investors after observing a financial crisis elsewhere. We study global coordination games of regime change in two regions linked by an initially unobserved macro shock. A crisis in region 1 is a wake-up call to investors in region 2. It induces them to reassess the regional fundamental and acquire information about the macro shock. Contagion can occur even after investors learn that region 2 has no ex post exposure to region 1. We explore normative and testable implications of the model. In particular, our results rationalize evidence about contagious currency crises and bank runs after wake-up calls and provide some guidance for future empirical work.

R&D subsidies in a duopoly market with outsourcing to the rival firm

AbstractThis paper investigates the effects of a public uniform R&D subsidy policy in a downstream duopoly market in which a nonintegrated firm, which faces a lower marginal cost, outsources inputs from its vertically integrated rival. The findings show that, in this market structure, such a policy has relevant effects largely differentiated between downstream competitors, as it can significantly modify the relative market shares and profitability of competing firms. Unlike the standard Cournot setting augmented with R&D, results show that the subsidy policy can have different (counterintuitive) effects on R&D investments, output, and profits of the vertically integrated producer and the vertically separated firm, which hold in both cases of exogenous and endogenous (optimal) subsidy. Our findings offer some testable implications and suggest that a subsidy policy in a market with outsourcing to a rival should also consider the different effects of this approach on competitors.

A Theory of Religious Affiliation

This paper develops a theory of religious affiliation within a framework in which religious denominations are faith intermediaries and in which risk-averse laypeople consider both religious rewards and risks in making affiliation decisions. Necessary and sufficient conditions for laypeople to affiliate with denominations suggest that their perceptions of denominational trustworthiness and of the combination of risk and return implicit in the doctrinal paths denominations prescribe, are key determinants. As such, denominations use doctrinal innovation to manage their affiliations. Overall, the theory is consistent with key empirical facts and yields testable implications on both aggregate and cross-denominational variation in religious affiliation.

An experimental investigation of the “follow own signal” decision rule under increased information uncertainty

PurposeThis study aims to examine individuals' tendency to strictly follow their own signal while ignoring predecessors' decisions when making decisions under varying degrees of uncertainty.Design/methodology/approachUsing a controlled laboratory experiment, the authors separate the follow-own-signal behavior from other types of behavior such as Bayes consistent or herd-like (i.e. follow-the-majority) behavior.FindingsAs the authors systemically increase the degree of uncertainty in the information environment, participants are increasingly more likely to act only on their own signal. This suggests that financial decisions that are made under highly uncertain market conditions may be more signal revealing, and hence, may lead to better information aggregation than previously thought. The authors also find that as uncertainty increases, participants are more likely to switch in and out of this behavior, suggesting that behavior under highly uncertain conditions may also be more random and complex.Originality/valueThe authors are the first to examine how uncertainty affects the follow-own-signal behavior. The authors also offer potential testable empirical implications, such as an increase in contrarian investing, home bias, and own-company ownership under times of increased uncertainty or in more uncertain markets.

A Search for Neutron to Mirror Neutron Oscillation Using Neutron Electric Dipole Moment Measurements

Baryon number violation is a key ingredient of baryogenesis. It has been hypothesized that there could also be a parity-conjugated copy of the standard model particles, called mirror particles. The existence of such a mirror universe has specific testable implications, especially in the domain of neutral particle oscillation, viz. the baryon number violating neutron to mirror-neutron (n−n′) oscillation. Consequently, there were many experiments that have searched for n−n′ oscillation, and imposed constraints upon the parameters that describe it. Recently, further analysis on some of these results have identified anomalies which could point to the detection of n−n′ oscillation. All the previous efforts searched for n−n′ oscillation by comparing the relative number of ultracold neutrons that survive after a period of storage for one or both of the two cases: (i) comparison of zero applied magnetic field to a non-zero applied magnetic field, and (ii) comparison where the orientation of the applied magnetic field was reversed. However, n−n′ oscillations also lead to variations in the precession frequency of polarized neutrons upon flipping the direction of the applied magnetic field. Precession frequencies are measured, very precisely, by experiments searching for the electric dipole moment. For the first time, we used the data from the latest search for the neutron electric dipole moment to constrain n−n′ oscillation. After compensating for the systematic effects that affect the ratio of precession frequencies of ultracold neutrons and cohabiting 199Hg-atoms, chief among which was due to their motion in non-uniform magnetic field, we constrained any further perturbations due to n−n′ oscillation. We thereby provide a lower limit on the n−n′ oscillation time constant of τnn′/|cos(β)|>5.7s,0.36T′<B′<1.01T′ (95% C.L.), where β is the angle between the applied magnetic field and the ambient mirror magnetic field. This constraint is the best available in the range of 0.36T′<B′<0.40T′.

Bayesian identification of structural coefficients in causal models and the causal false-positive risk of confounders and colliders in linear Markovian models

BackgroundCausal inference has seen an increasing popularity in medical research. Estimation of causal effects from observational data allows to draw conclusions from data when randomized controlled trials cannot be conducted. Although the identification of structural causal models (SCM) and the calculation of structural coefficients has received much attention, a key requirement for valid causal inference is that conclusions are drawn based on the true data-generating model.MethodsIt remains widely unknown how large the probability is to reject the true structural causal model when observational data from it is sampled. The latter probability – the causal false-positive risk – is crucial, as rejection of the true causal model can induce bias in the estimation of causal effects. In this paper, the widely used causal models of confounders and colliders are studied regarding their causal false-positive risk in linear Markovian models. A simulation study is carried out which investigates the causal false-positive risk in Gaussian linear Markovian models. Therefore, the testable implications of the DAG corresponding to confounders and colliders are analyzed from a Bayesian perspective. Furthermore, the induced bias in estimating the structural coefficients and causal effects is studied.ResultsResults show that the false-positive risk of rejecting a true SCM of even simple building blocks like confounders and colliders is substantial. Importantly, estimation of average, direct and indirect causal effects can become strongly biased if a true model is rejected. The causal false-positive risk may thus serve as an indicator or proxy for the induced bias.ConclusionWhile the identification of structural coefficients and testable implications of causal models have been studied rigorously in the literature, this paper shows that causal inference also must develop new concepts for controlling the causal false-positive risk. Although a high risk cannot be equated with a substantial bias, it is indicative of the induced bias. The latter fact calls for the development of more advanced risk measures for committing a causal type I error in causal inference.

The cyclicality of entry and exit: The role of imperfect information

In the U.S. manufacturing sector, the entry margin is strongly procyclical, whereas the exit margin is acyclical. This study attempts to explain the entry-exit margin asymmetry. It introduces imperfect information in an industry equilibrium model and finds that potential entrants cannot disentangle aggregate productivity from their own productivity, inducing a signal extraction problem. With imperfect information on the aggregate productivity, potential entrants underestimate variations in equilibrium factor prices and overestimate variations in the value of entering. This amplified entry margin, combined with a reasonable amount of general equilibrium forces, mute cyclical variations in the exit margin. With the proposed mechanism, the model economy generates 28% of the observed variations in the entrants’ productivity. Notably, several testable implications of the model economy are consistent with the properties of the U.S. data.

On the Use of Outcome Tests for Detecting Bias in Decision Making

The decisions of judges, lenders, journal editors, and other gatekeepers often lead to disparities in outcomes across affected groups. An important question is whether, and to what extent, these group-level disparities are driven by relevant differences in underlying individual characteristics, or by biased decision makers. Becker (1957) proposed an outcome test for bias leading to a large body of related empirical work, with recent innovations in settings where decision makers are exogenously assigned to cases and vary progressively in their decision tendencies. We carefully examine what can be learned about bias in decision making in such settings. Our results call into question recent conclusions about racial bias among bail judges, and, more broadly, yield four lessons for researchers considering the use of outcome tests of bias. First, the so-called generalized Roy model, which is a workhorse of applied economics, does not deliver a logically valid outcome test without further restrictions, since it does not require an unbiased decision maker to equalize marginal outcomes across groups. Second, the more restrictive Roy model, which isolates potential outcomes as the sole admissible source of analyst-unobserved variation driving decisions, delivers both a logically valid and econometrically viable outcome test. Third, this extended Roy model places strong restrictions on behavior and the data generating process, so detailed institutional knowledge is essential for justifying such restrictions. Finally, because the extended Roy model imposes restrictions beyond those required to identify marginal outcomes across groups, it has testable implications that may help assess its suitability across empirical settings.

Testing identifying assumptions in fuzzy regression discontinuity designs

We propose a new specification test for assessing the validity of fuzzy regression discontinuity designs (FRD‐validity). We derive a new set of testable implications, characterized by a set of inequality restrictions on the joint distribution of observed outcomes and treatment status at the cut‐off. We show that this new characterization exploits all of the information in the data that is useful for detecting violations of FRD‐validity. Our approach differs from and complements existing approaches that test continuity of the distributions of running variables and baseline covariates at the cut‐off in that we focus on the distribution of the observed outcome and treatment status. We show that the proposed test has appealing statistical properties. It controls size in a large sample setting uniformly over a large class of data generating processes, is consistent against all fixed alternatives, and has non‐trivial power against some local alternatives. We apply our test to evaluate the validity of two FRD designs. The test does not reject FRD‐validity in the class size design studied by Angrist and Lavy (1999) but rejects it in the insurance subsidy design for poor households in Colombia studied by Miller, Pinto, and Vera‐Hernández (2013) for some outcome variables. Existing density continuity tests suggest the opposite in each of the two cases.

Non-Tariff Measures and Competitiveness

In this paper, we explore how tariff and standard-like Non-Tariff Measures (NTMs) introduced by the EU are related with market conditions in domestic EU markets. While Tariffs work as a pure tax on import, standard-like NTMs potentially affcet costs of both domestic firms and foreign exporters. NTMs may not necessarily work as protectionist measures and even induce pro-competitive effects in the domestic market in the longer term, especially if we allow for firms mobility. The impact could be different for large and small firms. We extend the model by Melitz and Ottaviano (2008) to include Non-Tariff barriers. We derive some testable implications relating Non-Tariff barriers to the number of firms selling in the domestic market and average efficiency. The link between NTMs and domestic market conditions depends on whether they involve new standards and technical specifications imposed on both domestic and foreign firms or, rather, the extension to foreign firms of standards and technical specifications already adopted by domestic firms. In the first case, there is a decline in the number of firms and in average productivity; in the second case, NTMs induce pro-competitive effects: an increase in the number of firms and of average productivity. We then take the model to the data for a group of European countries and manufacturing industries. We combine Compnet data for 15 EU countries in 2001-2012, providing information on firms performance at the industry level and by size class, with the STC WTO-I-TIP database, with information on Specific Trade Concerns raised at the WTO on NTMs and with the Trains database with information on Tariffs. The NTMs that we consider have similar effects as in the second NTMs case in the theoretical model; the results for Tariff are in the same direction, albeit of a larger magnitude. These results are consistent with a theoretical framework allowing for firm mobility in the longer term.

Cointegration with structural changes and classical model of inflation in Spain, 1830–1998

In this article, we test a classical model of inflation with rational expectations for the case of Spain during the period 1830–1998. The principal testable implication is that money growth and inflation are cointegrated ruling out speculative bubbles. First, to detect episodes of potential explosive behaviour in the Spanish inflation rate, we use the recursive unit root tests for explosiveness recently proposed by Phillips et al. (2011), and Phillips et al. (2015a, 2015b). Second, we consider the possibility that a linear cointegrated regression model with multiple structural changes would provide a good empirical description of the classical model of inflation for Spain over this long period. Our methodology is based on the instability tests recently proposed in Kejriwal and Perron (2008, 2010) as well as the cointegration tests developed in Arai and Kurozumi (2007) and Kejriwal (2008).

SU(3) symmetry and its breaking effects in semileptonic heavy baryon decays

We employ the flavor SU(3) symmetry to analyze semileptonic decays of anti-triplet charmed baryons (Λc+,Ξc+,0) and find that the experimental data on B(Λc→Λℓ+νℓ) implies B(Ξc0→Ξ−e+νe)=(4.10±0.46)% and B(Ξc0→Ξ−μ+νμ)=(3.98±0.57)%. When this prediction is confronted with recent experimental results from Belle collaboration B(Ξc0→Ξ−e+νe)=(1.31±0.04±0.07±0.38)% and B(Ξc0→Ξ−μ+νμ)=(1.27±0.06±0.10±0.37)%, it is found that the SU(3) symmetry is severely broken. We then consider the generic SU(3) breaking effects both in decay amplitudes and the mixing effect between the anti-triplet and sextet charmed baryons. We find that the pertinent data can be accommodated in different scenarios but the breaking effects are inevitably large. In some interesting scenarios, we also explore the testable implications in these scenarios which can be stringently tested with more data become available. Similar analyses are carried out for the semileptonic decays of anti-triplet beauty baryons to octet baryons and anti-triplet charmed baryons. The validity of SU(3) for these decays can also be examined when data become available.

Soft gravitational radiation from multi-body collisions

We derive a universal expression for the gravitational radiation energy spectrum dEGW/dω at sub-leading order emitted from a generic gravitational hard scattering of multi-particles or multi-bodies. Our result includes all mathcal{O} (ω) corrections to the gravitational radiation flux from a generic 2 → N collision, in both the cases of massless and massive particles/bodies. We also show the dependence of the radiation energy flux by the quantum spin in case of particle collisions. Then, we consider the specific case of a gravitational elastic scattering of two massive bodies, i.e. m + M → m + M with m, M the masses of the two bodies respectively. We demonstrate that in this case all mathcal{O} (ω) contributions to the energy flux exactly cancel each others. Nevertheless, we also show that, for a 2 → 2 inelastic scattering, the inclusion of sub-leading soft gravitons leads to a not zero radiation flux, having a simple expression in certain asymptotic regimes. Our results can be applied to the case of Black Hole collisions with possible testable implications in gravitational waves physics.

Selection principles for Gaia

The Gaia hypothesis considers the life-environment coupled system as a single entity that acts to regulate and maintain habitable conditions on Earth. In this paper we discuss three mechanisms which could potentially lead to Gaia: Selection by Survival, Sequential Selection and Entropic Hierarchy. We use the Tangled Nature Model of co-evolution as a common framework for investigating all three, using an extended version of the standard model to elaborate on Gaia as an example of an entropic hierarchy. This idea, which combines sequential selection together with a reservoir of diversity that acts as a ‘memory’, implies a tendency towards growth and increasing resilience of the Gaian system over time. We then discuss how Gaian memory could be realised in practice via the microbial seed bank, climate refugia and lateral gene transfer and conclude by discussing testable implications of an entropic hierarchy for the study of Earth history and the search for life in the universe. This paper adds to the existing taxonomy of Gaia hypotheses to suggest an “Entropic Gaia” where we argue that increasing biomass, complexity and enhanced habitability over time is a statistically likely feature of a co-evolving system.

Assessing Spatio‐Temporal Variability of Free Gas in Surficial Cohesive Sediments Using Tidal Pressure Fluctuations

AbstractFrom a geohazard assessment perspective, the distribution, content, and dynamics of free gas in surficial sediment were addressed by imaging and monitoring the upper 15 m beneath the shelf offshore Nice, France. Based on high‐resolution seismic data covering three sites where pore pressure was recorded over three and a half years, the presence of free gas was determined in the upper 2.75–14.75 m of cohesive, silty clay. Seismic velocity changes delineate two layers with gas volume fractions ranging from 0.12% to 1.89%. By considering the tidal response recorded by eight pore pressure sensors, estimates of gas volume fractions vary from 0.26% to more than 9.4% on a spatio‐temporal scale which cannot be achieved with seismic data. To depict spatio‐temporal patterns three types of free gas occurrence (FGO) were distinguished. Type 3 FGO uniquely showed sawtooth fluctuations in overpressure of 27%–45% of the hydrostatic effective stress as evidence of bubble growth and rise. The other two types showed long‐term overpressure trends indicative of a situation whereby bubble growth has ceased. Type 1 FGOs are distinguished from type 2 by their gas volume fraction lower than 9.4% and ratios of overpressure to hydrostatic effective stress lower than 0.3. Values higher than this threshold are considered sufficient for shear failure to initiate from the steep shelf edge (>20°). Beyond site‐specific insights, the distinction of FGO from their overpressure levels yields testable implications for the dynamics of methane in sediments.