1995 V.P.I & S.U. Department of Economics Working Paper Series

1995 Department of Economics Working Papers




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  1. E95-01 Sheryl B. Ball and Catherine C. Eckel
    Buying Status: Experimental Evidence on Status in Negotiation
    January 1995




  2. E95-02
    Teyu Chou and Hans Haller
    The Division of Profit in Sequential Innovation Reconsidered
    January 1995



  3. E95-03
    Fred E. Foldvary
    Axiomatic Propositions as the Foundation for Social Science
    February 1995



  4. E95-04
    Robert P. Gilles and Suzanne Scotchmer
    Decentralization in Club Economies with Multiple Private Goods
    March 1995



  5. E95-05
    Robert P. Gilles and Suzanne Scotchmer
    Decentralization in Club Economies with Multiple Private Goods
    March 1995



  6. E95-06
    Robert P. Gilles and Suzanne Scotchmer
    Decentralization in Club Economies: How Multiple Private Goods Matter
    March 1995



  7. E95-07
    Richard Ashley
    Non-Nested Model Selection/Validation: Making Credible Postsample Inference Feasible
    April 1995



  8. E95-08
    Fred E. Foldvary
    Ignorance, Apathy, and Greed as Root Causes of Social Problems
    May 1995



  9. E95-09
    Fred E. Foldvary
    The Measurement of Inequality, Concentration and Diversification
    May 1995



  10. E95-10
    Robert P. Gilles and Dimitrios Diamantaras
    Linear Cost Sharing in Economies with Non-Samuelsonian Public Goods: Core Equivalence
    August 1995



  11. E95-11
    Roger Lagunoff and Akihiko Matsui
    An "Anti-Folk Theorem" for a Class of Asynchronously Repeated Games
    August 1995



  12. E95-12
    Hans H. Haller
    Household Decisions and Equilibrium Efficiency
    August 1995



  13. E95-13
    Petra Geraats and Hans H. Haller
    Shareholders' Choice
    August 1995



  14. E95-14
    Hans H. Haller
    Non-Additive Beliefs in Solvable Games
    August 1995



  15. E95-15
    Jean Derks and Hans H. Haller
    Weighted Nucleoli
    August 1995



  16. E95-16
    Nancy A. Lutz
    Moral Hazard, Adverse Selection, and Optimal Ownership Structure in Multi-Store Retailing
    August 1995



  17. E95-17
    Charles Michalopoulos
    Women's Employment and Women's Attitudes Toward Work
    August 1995



  18. E95-18
    Nancy A. Lutz and V. Padmanabhan
    Product Insurance and Consumer Purchase Behavior in Personal Computers
    September 1995



  19. E95-19
    Charles Michalopoulos and Philip K. Robins
    Child Care and the Supply of Labor in Canada and the United States
    September 1995



  20. E95-20
    David H. Greenberg, David Long, Daniel Meyer, Charles Michalopoulos, and Philip K. Robins
    Using Microsimulation to Help Design Pilot Demonstrations: An Illustration from the Canadian Self- Sufficiency Project
    September 1995



  21. E95-21
    Anne Sibert and W. Perraudin
    The Timing of Privatizations
    September 1995



  22. E95-22
    Roger Lagunoff
    The Evolution of Pareto Optimal Behavior in Repeated Coordination Problems
    September 1995



  23. E95-23
    Roger Lagunoff
    Sufficiently Specialized Economies Have Nonempty Cores
    September 1995



  24. E95-24
    Roger Lagunoff
    On the Dynamic Selection of Mechanisms for Public Projects
    September 1995



  25. E95-25
    Gerhardt Glomm and Roger Lagunoff
    On the Social Stability of Coalitional Property Rights Regimes
    September 1995



  26. E95-26
    Alan P. Kirman and Nicolaas J. Vriend
    Evolving Market Structure: A Model of Price Dispersion and Loyalty
    September 1995



  27. E95-27
    Annemarie Nagel and Nicolaas J. Vriend
    An Experimental Study of Adaptive Behavior
    September 1995



  28. E95-28
    Martin Shubik and Nicolaas J. Vriend
    A Behavioral Approach to a Strategic Market Game
    September 1995



  29. E95-29
    Nicolaas J. Vriend
    Is the Theory of Complexity Going to Solve the Mystery of Adam Smith's `Invisible Hand'?
    September 1995



  30. E95-30
    Kai Nagel and Nicolaas J. Vriend
    Irrational Behavior and Economic Theory. A Reconsideration
    September 1995



  31. E95-31
    Susan K. Snyder
    Testable Restrictions of General Equilibrium Models
    September 1995



  32. E95-32
    Susan K. Snyder
    Testable Restrictions of Pareto Optimal Public Good Provision
    September 1995



  33. E95-33
    Susan K. Snyder and Barry R. Weingast
    The American System of Shared Powers: The President, Congress, and the NLRB
    September 1995



  34. E95-34
    Yong Wang and Hanqing Zhou
    Money and Credit with Private Information
    September 1995



  35. E95-35
    Yong Wang
    Asymmetric Information in an Overlapping Generations Economy
    September 1995



  36. E95-36
    Catherine C. Eckel, Doug Eckel, and Vijay Singal
    Privatization and Competition: Industry Effects of the Sale of British Airways and Air Canada
    August 1995



  37. E95-37
    Catherine C. Eckel and Philip Grossman
    Equity and Fairness in Economic Decisions: Evidence from Bargaining Experiments
    April 1995



  38. E95-38
    Sheryl Ball, Catherine C. Eckel, Philip Grossman and William Zame
    Status in Markets
    September 1995



  39. E95-39
    Sheryl Ball, Catherine C. Eckel, Philip Grossman
    Status as a Coordination Device in Battle-of-the-Sexes Games
    September 1995



  40. E95-40
    Catherine C. Eckel and Robert P. Gilles
    Fairness in Ultimatum Bargaining with Outside Options: Experimental Evidence
    September 1995



  41. E95-41
    Hyungtaik Ahn and Thomas M. Stoker
    Semiparametric Estimation of Average Derivatives using Local Polynomial Regression
    September 1995



  42. E95-42
    Paul Rhode and Mark Stegeman
    Evolution Through Imitation (with applications to duopoly)
    September 1995



  43. E95-43
    Ian Gale and Mark Stegeman
    Sequential Auctions of Endogenously Valued Objects
    September 1995



  44. E95-44
    Mark Stegeman
    Near-Walrasian Equilibria of a Model with Advertising and Search
    September 1995



  45. E95-45
    Ian Gale, Don Hausch and Mark Stegeman
    Sequential Procurement Auctions
    September 1995



  46. E95-46
    Ian Gale and Mark Stegeman
    Optimal Handicapping in All-Pay Auctions
    September 1995



  47. E95-47
    Mark Stegeman
    Rationalizability in Extensive Forms
    September 1995



  48. E95-48
    Mark Stegeman
    Monopoly Pricing with Visiting Costs
    September 1995



  49. E95-49
    Anthony Dziepak
    Spatial Competition with Incomplete Information
    November 1995



  50. E95-50
    Anthony Dziepak
    More Firms in Hotelling's "Stability in Competition"
    November 1995



  51. E95-51
    Teyu Chou
    Product Differentiation with Sequential Entry in a Two-Dimensional Space
    November 1995



  52. E95-52
    Richard Ashley
    Non-Nested Model Selection/Validation: Making Postsample Inference More Credible
    December 1995



  53. E95-53
    Robert P. Gilles, Hans H. Haller and Pieter H.M. Ruys
    Semi-Core Equivalence
    December 1995



  54. E95-54
    Nicolaas J. Vriend
    Is the Study of Complex Adaptive Systems Going to Solve the Mystery of Adam Smith's `Invisible Hand' ?
    December 1995



  55. E95-55
    Sumru Altug, Richard Ashley and Douglas M. Patterson
    Are Technology Shocks Nonlinear?
    December 1995


E95-01
Sheryl B. Ball and Catherine C. Eckel
Buying Status: Experimental Evidence on Status in Negotiation
January 1995

Status is an important motivator of human behavior. This paper examines the extent to which people are willing to adjust their negotiating behavior in response to their opponent's status level. The results of a series of experiments on the affect of status on student subjects' negotiating behavior are reported. We find that status affects human interactions in a positive way, which causes people to seek status. It is, therefore, a successful advertising strategy to associate high status with consumption of a product.

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E95-02
Teyu Chou and Hans Haller
The Division of Profit in Sequential Innovation Reconsidered
January 1995

A model of sequential innovation is analyzed in which infringement occurs and the outcome of litigation is uncertain. With concavity of the probability distribution function of winning litigation, it can be shown that a basic researcher holding a patent is able to extract all the profit facilitated by the basic innovation. This finding is in contrast to a result in the “fencepost” system literature, where infringement is agreed upon by both parties and no court action is needed. The complete-profit-transfer equilibria are fully characterized and comparative statics with respect to parameters of litigation cost and product development cost are performed. The paper also explores the role of patent breadth. Under rather general circumstances, broader patent breadth may diminish the patent-holder’s chance to achieve the desired equilibrium outcome, to extract all the profit from the firm producing the next generation product.

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E95-03
Fred E. Foldvary
Axiomatic Propositions as the Foundation for Social Science
February 1995

Historicism (empiricism), positivism (hypothetical-deduction), apriorism (axiomatic- deduction), and interpretive understanding have been criticized as flawed or insufficient foundations for social science theory. This paper presents as the foundation for science the concept of axiomatic propositions under which both positivist and interpretive methodologies are integrated as complementary rather than exclusive methods. The paper demonstrates how the axiomatic propositions apply to the various sciences, with an emphasis on how economics, in particular, is founded.

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E95-04
Robert P. Gilles and Suzanne Scotchmer
Decentralization in Club Economies with Multiple Private Goods
March 1995

Assuming that consumers' tastes for private goods depend on the partition of the economy into clubs and on the public goods provided, we investigate how and whether Pareto efficient and core allocations can be implemented in club economies with nonanonymous crowding. With free trade among clubs at a common price vector, decentralization in an unreplicated club economy might require that agents conjecture other prices when the club structure is different, and with local budget balance, decentralization might not be possible even then. These complications are not present with local trade. Our implementation theorems do not require the restrictive linear structure assumed for Lindahl equilibrium, and do not require the hypothesis used in much of the literature that private goods are "essential."

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E95-05
Robert P. Gilles and Suzanne Scotchmer
Decentralization in Replicated Club Economies with Multiple Private Goods
March 1995

We investigate how and whether efficient allocations and core allocations can be decentralized in replicated club economies when there can be strong complementarities and substitutability between private goods and club goods. For the case of free trade among clubs we define a notion of optimal scale for the economy. This contrasts with the focus of club theory when there is only one private good, which is on the optimal scale for clubs themselves. We show that contrary to what is true with one private good, it might be optimal for consumers with the same tastes to occupy clubs of different size and to trade with each other. Although in unreplicated club economies decentralization might require conjectural prices for private goods in out-of-equilibrium club structures, such price conjectures are not required in replicated club economies of appropriate scale. We show this without requiring the linear structure and monotonicity assumed in Lindahl equilibrium, and without the strong assumption that private goods are "esssential."

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E95-06
Robert P. Gilles and Suzanne Scotchmer
Decentralization in Club Economies: How Multiple Private Goods Matter
March 1995

This paper summarizes the results and models as presented Working Paper E95-05. This paper has been submitted to the conference volume on club economies edited by David Pines, Cambridge University Press.

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E95-07
Richard Ashley
Non-Nested Model Selection/Validation: Making Credible Postsample Inference Feasible
April 1995

Effective, credible inference with respect to the postsample forecasting performance of time series models is widely held to be infeasible. Consequently, the model selection and Granger-causality literature have focused almost exclusively on in-sample tests, which can easily be biased by typical specification-search activity. Indeed, the post-sample error series generated by competing models are typically cross-related, serially correlated, and not even clearly gaussian; thus, postsample inference procedures are necessarily only asymptotically valid. As a result, a postsample period large enough to yield credible inferences is perceived to be too costly in terms of sample observations foregone. This paper describes a new, re-sampling based, approach to postsample inference which, by explicitly quantifying the inferential uncertainty caused by the limited length of the postsample period, makes it feasible to obtain credible postsample inferences using postsample periods of reasonable length. For a given target level of inferential precision - e.g., significance at the 5% level - this new approach also provides explicit estimates of both how strong the postsample forecasting efficiency evidence in favor of one of the two models must be (for a given length postsample period) and how long a postsample period is necessary, if the evidence is of given strength. These results indicate that postsample model validation periods substantially longer than the 5 to 20 periods typically reserved in past studies are necessary in order to credibly detect 20% - 30% MSE reductions. This approach also quantifies the inferential impact of different forecasting efficiency criterion choices - e.g., MSE versus MAE versus asymmetric criteria and the use of expected loss differentials versus ratios of expected losses. The value of this new approach to postsample inference is illustrated using postsample forecasting error data from Ashley, Granger and Schmalensee (1980), in which evidence was presented for unidirectional Granger-causation from fluctuations in aggregate US consumption expenditures to fluctuations in US aggregate expenditures on advertising.

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E95-08
Fred E. Foldvary
Ignorance, Apathy, and Greed as Root Causes of Social Problems
April 1995

The root causes of social problems are traced to ignorance, apathy, and greed. These conditions are not necessary, but sufficient to cause economic maladies. The paper analyses this tripartite foundation of social problems and the interconnections between the three causes. An application to education concludes that an effective motivator of social action consists of propositions specifically directed to increase sympathy for some cause, which can include antipathy tot its opponents.

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E95-09
Fred Foldvary
The Measurement of Inequality, Concentration and Diversification
May 1995

The Lorenz curve and Gini coefficient are typically used to measure inequality. A different way to measure in equality is introduced here: I = CN, the product of concentration and number of units. The resulting index can be interpreted with reference to an inequality base where one unit owns all and the rest nothing. This inequality index also integrates the measurement of inequality, concentration, and diversification into one system, where diversification is measured as the inverse of concentration. I = CN accommodates various measures of concentration, including the Herfindahl-Hirschman and Tideman-Hall indexes.

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E95-10
Robert P. Gilles and Dimitrios Diamantaras
Linear Cost Sharing in Economies with Non-Samuelsonian Public Goods: Core Equivalence
August 1995

We consider an economy with public goods exhibiting uniform crowding in provision. We show that in such economies there are many positive results, in particular concerning the equivalence of cores and certain cost share equilibrium concepts. In this paper we address the case of linear cost haring. In a linear cost sharing situation all agents in the economy optimize given a certain fixed cost share to be contributed towards the provision of public goods in the economy. Hence, each agent pays a certain fraction of the total establishment costs of the public goods and these cost shares are common knowledge. We show that for a certain fixed contribution scheme the resulting linear cost share equilibria are equivalent to corresponding core allocations, in which the core is based on the integral of the individual cost shares.

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E95-11
Roger Lagunoff and Akihiko Matsui
An "Anti-Folk Theorem" for a Class of Asynchronously Repeated Games
August 1995

It is well known from the Folk Theorem that infinitely repeated games admit a multitude of equilibria. This paper demonstrates that in some types of games, the Folk Theorem form of multiplicity is an artifact of the standard representation which assumes perfect synchronization in the timing of actions between the players. We define here a more general family of repeated settings called renewal games. Specifically, a renewal game is a setting in which a stage game is repeated in continuous time, and at certain stochastic points in time determined by an arbitrary renewal process some set of players may be called upon to make a move. A stationary, ergodic Markov process determines who moves at each decision node. We restrict attention in this paper to a natural subclass of renewal games called asynchronously repeated games, in which no two individuals can change their actions simultaneously. Special cases include the alternating move game, and the Poisson revision game. In the latter, each player adjusts his action independently at Poisson distributed times. Our main result concerns asynchronously repeated games of pure coordination (where the payoffs of all players in the stage game are identical up to an affine transformation): given a positive epsilon, if players are sufficiently patient then every Perfect equilibrium payoff comes within epsilon of the Pareto dominant payoff. We also show that the "Folk wisdom" in the standard model that repetition always expands (weakly) the set of equilibrium payoffs is not true generally in asynchronously repeated games.

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E95-12
Hans H. Haller
Household Decisions and Equilibrium Efficiency
August 1995

A household may consist of several members, each with individual preferences and/or resources. The question is addressed whether it makes any difference who participates in the market, households as entities or household members individually. Certain intra-household externalities can be fully internalized by the respective households so that competitive exchange among households is efficient. As a rule, such intra-household externalities are not fully internalized by individual household members so that competitive exchange among individuals is only efficient in exceptional cases.

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E95-13
Petra Geraats and Hans H. Haller
Shareholders' Choice
August 1995

This paper focuses on the question which production decision would result, if in fact the shareholders of a firm exercised their control rights. Because of conflicting interests among shareholders, there is a need for a collective decision mechanism. Because of its prominence and simplicity, we concentrate on the institution of simple majority voting by shareholders. With a single firm within a mean-variance context, the median voter paradigm prevails and strong conclusions are derived. In particular, disagreement among initial shareholders is a generic phenomenon. While net market value maximization is never the outcome, it often emerges as the asymptotic objective of the median shareholder as the number of investors tends to infinity. There are marked differences between before-trade and after-trade shareholder voting. Hence different motives for the acquisition and holding of stock cause different outcomes. Also, the outcomes are sensitive to the nature of heterogeneity of shareholder characteristics. Further, our various cases illustrate that (actual or asymptotic) shareholder unanimity and (actual or asymptotic) net market value maximization are, by and large, unrelated phenomena. This finding contrasts with the results under replication where asymptotic shareholder unanimity and asymptotic net market value maximization go hand in hand.

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E95-14
Hans H. Haller
Non-Additive Beliefs in Solvable Games
August 1995

In general, the introduction of non-additive probabilities (capacities) affects the solvability of strategic games. For special classes of finite two-person zero-sum games, Nash equilibria in mixed strategies and Nash equilibria in simple capacities yield identical equilibrium predictions.

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E95-15
Jean Derks andHans H. Haller
Weighted Nucleoli
August 1995

Cooperative games in characteristic function form (TU games) are considered. We allow for variable populations or carriers. Weighted nucleoli are defined via weighted excesses for coalitions. A solution satisfies the Null Player Out (NPO) property, if elimination of a null player does not affect the payoffs of the other players. For any single valued and efficient solution, the NPO property implies the null player property. We show that a weighted nucleolus has the null player property if and only if the weight of a coalition is weakly decreasing with respect to coalition inclusion. Weighted nucleoli possessing the NPO- property can be characterized by means of a multiplicative formula for the weights of coalitions.

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E95-16
Nancy A. Lutz
Moral Hazard, Adverse Selection, and Optimal Ownership Structure in Multi-Store Retailing
August 1995

Multi-store retailers face important organizational problems. The chain must attract skilled store managers while continuing to provide strong incentives for central management. One way to attract skilled store managers is to franchise some stores. Previous work has suggested that a retailer will maximize total chain profit by offering franchises at terms that are designed to attract every skilled manager. The chain will only company-own some units if there are more stores than skilled managers; in this case the chain may choose to staff the additional stores with lower-skilled employee managers. However, some large and successful chains have a queue of skilled franchise applicants while continuing to hire employee managers. This paper explains this phenomenon with a model that combines adverse selection and moral hazard. The franchise contract attracts skilled managers by offering them a large fraction of store profit. However, this reduces the fraction of total chain profit retained by the chain's central managers. The result is weaker incentives for chain-level investments in advertising and the like. The optimal number of franchised stores may be smaller than the number of skilled managers; in this case skilled managers will queue for franchises while less-skilled managers are hired as employees.

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E95-17
Charles Michalopoulos
Women's Employment and Women's Attitudes Toward Work
August 1995

One of the ongoing questions in economics is the large increase in the employment of American women in the last few decades. This paper the role of women's preferences toward work in explaining the growth in women's employment. Using attitudinal measures from the National Longitudinal Surveys of Labor Market Experience as proxies for preferences, the paper probes two issues. First, do changes in these attitudinal responses help predict changes in hours of work over time? If they do, then what factors help predict changes in the attitudinal responses? The results indicate that changes in attitudinal responses "explain" as much as one-third of the growth in hours worked within a cohort, and a substantial amount of the change in hours worked across cohorts. In addition, changes in work experience help explain changes in attitudinal responses, but account for only a small portion of the change.

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E95-18
Nancy A. Lutz and V. Padmanabhan
Product Insurance and Consumer Purchase Behavior in Personal Computers
September 1995

Buyers of many consumer durables are offered extended warranties, service contracts, or maintenance agreements at the time of purchase. We examine consumer behavior in purchasing such product insurance. Our sample is made up of individuals who purchased DOS-based personal computers from a major manufacturer. We study whether computer type (desktop or laptop), processor speed, and demographic characteristics affect demand for product insurance.

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E95-19
Charles Michalopoulos and Philip K. Robins
Child Care and the Supply of Labor in Canada and the United States
September 1995

This paper compares child care choices and employment of mothers of young children in the United States and Canada. Because there is a natural separation of markets between the two countries, and because the citizens of the two countries are subject to different systems of subsidies and regulations, we hope this additional variation will help identify the effects of federal subsidies and local regulations on child care and employment choices. We find that in both countries about 40 percent of mothers do not work and nearly 20 percent work part time and that the overall distribution of child care choices is similar in the two countries. However, Canadian families pay substantially less on average for child care than American families, and the two countries have substantially different subsidies for child care. Nevertheless, we are unable to find strong evidence that subsidies and prices are important determinants of employment and child care choices.

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E95-20
David H. Greenberg, David Long, Daniel Meyer, Charles Michalopoulos, and Philip K. Robins
Using Microsimulation to Help Design Pilot Demonstrations: An Illustration from the Canadian Self- Sufficiency Project
September 1995

This paper describes how microsimulation analysis was used to help design a social experiment currently being conducted in two provinces in Canada. To our knowledge, microsimulation has never been used before for this purpose, although the technique has been used to assist development of a couple of nonexperimental demonstration programs. For the Canadian experiment, the microsimulation analysis was used primarily for choosing among alternative program models and for refining the selected model, but it had other important uses as well, such as helping to project the potential financial liability to the Canadian government. The microsimulation analysis provided benchmark estimates of the employment responses to the experimental program. We compare these predicted responses to actual responses during the first year of the program and find they are remarkably close.

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E95-21
Anne Sibert and W. Perraudin
The Timing of Privatizations
September 1995

abstract not available yet.

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E95-22
Roger Lagunoff
The Evolution of Pareto Optimal Behavior in Repeated Coordination Problems
September 1995

This paper characterizes the asymptotic behavior of an ongoing society facing a repeated coordination problem. This society has a certain demographic structure: generations of individuals asynchronously supercede their "parents," creating an entry/exit process that allows individuals with possibly different beliefs to enter society. A self confirming equilibrium (SCE) belief process describes an evolution of beliefs in this society consistent with a self confirming equilibrium of the repeated game. Due to Fudenberg and Levine (1993), SCE is weaker than Nash as it requires correct forecasts of an individual only along the realized path during the individual's lifetime. Since individuals' beliefs on out-of- equilibrium behavior may vary, an SCE belief process may admit random and heterogeneous forecasts in the form of mutations of beliefs across generations as newborn individuals enter the system. The main result shows that with belief mutation, for any repeated coordination problem, the Pareto dominant equilibrum is a globally absorbing state of the dynamic process. This result does not involve either of the usual assumptions of myopia or inertial behavior common in evolutionary models. Nor is this result possible if only Nash rather than self confirming equilibria are considered. Finally, the result still holds if beliefs come to approximate SCE beliefs with the passage of time.

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E95-23
Roger Lagunoff
Sufficiently Specialized Economies Have Nonempty Cores
September 1995

An economy with a nonempty core may plausibly be regarded as socially stable since there exists allocations against which no group in the economy wishes to "recontract out." Aside from classical economies, it is not generally known what are the primitives of an economy that give rise to a nonempty core. This paper finds a class of perturbations that operate directly on economic primitives to generate a nonempty core. These perturbations are characterized by two properties which have economic content. The first is a notion of specialization - individuals hold goods and essential inputs to productive processes that are not readily available elswhere in the economy. The second is a curvature condition. Each agent's preferences must display sufficient curvature so that another person's specialized holdings are valued by that agent. It is shown that for any economy of a general class that includes possibly local nonconvexities and a wide variety of property rights configurations, if the economy is sufficiently specialized and the curvature condition is satisfied, then the corresponding NTU game is balanced. Hence, the economy has a nonempty core.

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E95-24
Roger Lagunoff
On the Dynamic Selection of Mechanisms for Public Projects
September 1995

This paper describes a dynamic model in which the provision mechanism for a public project is itself the object of locational choice of individuals. Individuals in an ongoing society must choose between a Majority Rule mechanism and a Voluntary Contribution mechanism. Each mechanism determines a funding decision for a local public project which is repeated over time. Generations of individuals asynchronously supercede their "parents," creating an entry/exit process that allows individuals with possibly different beliefs to enter society. A self confirming equilibrium (SCE) belief process describes an evolution of beliefs in this society consistent with a self confirming equilibrium of the repeated location/provision game. Due to Fudenberg and Levine (1993), SCE is weaker than Nash as it requires correct forecasts of an individual only along the realized path during the individual's lifetime. Since individuals' beliefs on out-of-equilibrium behavior may vary, an SCE belief process may admit random and heterogeneous forecasts in the form of mutations of beliefs across generations as newborn individuals enter the system. It is shown that the process with belief mutation results in a globally absorbing state in which the Majority Rule mechanism is the unique survivor of the two.

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E95-25
Gerhardt Glomm and Roger Lagunoff
On the Social Stability of Coalitional Property Rights Regimes
September 1995

We present a model of coalitional property rights (CPR) regimes - regimes in which ownership of a good is attributable to coalitions of various sizes. Specifically, for each good, we define a legal structure that specifies the legal coalitions of individuals that share a communal claim to that good. Generally, each legal coalition may use exclusionary rules to allocate its holdings internally. These rules allow eligible subcoalitions to recontract by expropriating some fraction of the legal coalition's endowment. We then ask: what types of CPR regimes are socially stable in the sense of having a nonempty core? We give conditions on the legal structure and the primitives of the economy that achieve social stability in this sense. We emphasize two cases of particular interest. 1. Unanimity. Unanimity is required for a legal coalition to recontract against (block) the status quo. In this case, the core is nonempty under standard assumptions. Each agent's ability to veto an alternative allocation allows a characterization in terms of the economies that are privatized by dividing up the communal endowment among the members of each legal coalition. 2. Pure Exclusion. Many eligible subcoalitions can expropriate the legal coalition's entire endowment. An example is the collection of simple majorities. The presence of cycles can easily lead to social instability. We show that if endowment holdings are sufficiently "specialized" and each agent's "veto power" sufficiently large, then stability can be achieved despite the presence of cycles in some goods.

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E95-26
Alan P. Kirman and Nicolaas J. Vriend
Evolving Market Structure: A Model of Price Dispersion and Loyalty
September 1995

We try to understand the behavior of buyers and sellers on the Marseilles whole-sale fish market. Two of the stylized facts of that market are high loyalty of buyers to sellers, and persistent price dispersion, although the same population of sellers and buyers meets in the same market hall on every day. We build a minimal model of adaptive agents. Sellers decide on quantities to supply, prices to ask, and how to treat loyal customers. Buyers decide which seller to visit, and which prices to accept. Learning takes place through reinforcement. We observe the emergence of both stylized facts price dispersion and high loyalty. In a co-evolutionary process, buyers learn to become loyal because sellers learn to offer higher utility to loyal buyers, while these sellers, in turn, learn to offer higher utility to loyal buyers because they happen to realize higher gross revenues from loyal buyers.

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E95-27
Annemarie Nagel and Nicolaas J. Vriend
An Experimental Study of Adaptive Behavior
September 1995

We consider a simple oligopolistic market game, in which the players are competing firms in the same market of a homogeneous consumption good. The consumer side is represented by a fixed demand equation. The firms have to decide how much to produce of a perishable consumption good, and they decide upon a number of information signals to be sent into the population, in order to attract customers. As the firms do not have any knowledge about their environment, they are forced to behave adaptively. We analyze in how far various stylized learn/search algorithms available from psychology, engineering and computer science can be useful to characterize adaptive behavior of human agents, and in how far the experiments tell us which kind of algorithms would be appropriate ones to use in simulations of artificial economies.

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E95-28
Martin Shubik and Nicolaas J. Vriend
A Behavioral Approach to a Strategic Market Game
September 1995

In this paper we interlink a dynamic programming, a game theory and a behavioral simulation approach to the same problem of economic exchange. The size and complexity of the strategy sets for even a simple infinite horizon exchange economy are so overwhelmingly large that it is reasonably clear that individuals do not indulge in exhaustive search over even a large subset of the potential strategies. Furthermore unless one restricts the unadorned definition of a noncooperative equilibrium to a special form such as a perfect noncooperative equilibrium, almost any outcome can be enforced as an equilibrium by a sufficiently ingenious selection of strategies. In essence, almost anything goes, unless the concept of what constitutes a satisfactory solution to the game places limits on permitted or expected behavior. The latter presumes that the players follow the same introspective process as the game-theorist. As these refinements may be hard to justify, it is interesting to complement this introspective approach with a study of whether interactive market processes provide enough structure to tie down the set of strategies played. Karatzas, Shubik and Sudderth [1992] formulated a simple infinite horizon economic exchange model involving a continuum of agents as a set of parallel dynamic programs, and were able to establish the existence of a stationary noncooperative equilibrium. In order to obtain an explicit closed form solution for the optimal policy and equilibrium wealth distribution, it relies on a particular utility function. In order to match these analytical results with a behavioral approach, we first develop simulation models of market processes with agents learning through reinforcement. Second, we consider more general classes of utility functions.

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E95-29
Nicolaas J. Vriend
Is the Theory of Complexity Going to Solve the Mystery of Adam Smith's `Invisible Hand'?
September 1995

This essay starts with the observation that the central problems of economic theory have remained the same since Adam Smith: How, why, and when does the 'invisible hand' work? We argue that the recently developed framework of 'complex adaptive systems' may help address these types of questions.

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E95-30
Kai Nagel and Nicolaas J. Vriend
Irrational Behavior and Economic Theory. A Reconsideration
September 1995

Is it true that relatively orderly behavior of an economy (e.g., the `Law of Demand') does not depend upon some form of rationality of the individual agents (be it deductive profit/utility maximizing, or any kind of inductive reasoning, learning or biological adaptation/replication)? In other words: Can such order be achieved through self-organization of resource flows plus selection, operating on this self-organized economy, through resource constraints? Rationality and evolution/self-organization/selection are complementary. We do not claim that economic models without rationality would be realistic or even useful economic models. But what one would like to know is what role does this rationality exactly play in economic theory/models. Therefore, it might be a very instructive exercise to try to construct an economic model without any rationality.

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E95-31
Susan K. Snyder
Testable Restrictions of General Equilibrium Models
September 1995

This paper examines the restrictions that general equilibrium models place on market behavior. I show that with a finite set of observations on prices, individual incomes, and aggregate endowments, the pure exchange model is testable without any parametric assumptions on the utility functions. I derive the testable restrictions of the model with two observations and two consumers. These restrictions provide non-parametric tests of the theory and can also generate predictions about equilibrium behavior in a market economy. The broader significance of the existence of these restrictions is that they are derived independently of the properties of equilibria in the model, thus demonstrating that we can test equilibrium theories without first determining the general existence, uniqueness, or stability of equilibria. I further show that the testable restrictions of these models depend on observing the consumer incomes; hence the theory of competitive equilibrium is testable in the class of pure exchange models studied, but Pareto optimality is not. This paper then extends the analysis of testable restrictions of non-parametric equilibrium models to a model of household labor supply. Chiappori has developed a model of collective rationality as an alternative to the neoclassical model of household behavior. I derive the necessary and sufficient conditions for data on household consumption, household members' individual labor choices, and wages to be consistent with the collective rationality model. Thus without observing the allocation of consumption within the household, we can test between the neoclassical model and the collective rationality model of household behavior.

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E95-32
Susan K. Snyder
Testable Restrictions of Pareto Optimal Public Good Provision
September 1995

Economic theory generally predicts that public goods within an economy or a group will be provided at an inefficient level. This can be a difficult hypothesis to test, however, because it is difficult to observe or to elicit each individual's willingness-to-pay for a public good. This paper provides testable restrictions of a model of Pareto optimal public good provision. These tests do not depend on parametric specification of the utility functions or production functions of the economy. While these restrictions are for an economy with production, one can use a subset of the restrictions to test the Pareto optimality of consumption. To implement these tests we need only two observations of aggregate consumption and prices of private and public goods, and individual after-tax incomes.

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E95-33
Susan K. Snyder and Barry R. Weingast
The American System of Shared Powers: The President, Congress, and the NLRB
September 1995

This paper develops and tests a model of political influence on federal regulatory agencies. Previous work on this topic has tended to emphasize the influence of either the legislative branch or the executive branch. The appointment power the President and Senate share, however, provides an important tool that politicians can use to influence agency policy. Thus we use bargaining theory to model the interaction between the legislative and executive branches in choosing agency policy. We predict, however, that they may be constrained in implementing their policy choice by the institutional features of the agency. We apply this model to the National Labor Relations Board to predict the policy change created by each appointment to the NLRB from 1949 to 1988. We show that this constrained, integrated model of political influence provides better predictions than models that focus on only the executive or legislative branch, or that do not take into account the institutional features of the NLRB.

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E95-34
Yong Wang
Money and Credit with Private Information
September 1995

This paper studies the existence and the properties of a monetary equilibrium in a model where money's roles, both as a medium of exchange and as a store of value, are challenged by other financial instruments. Alternative to money, credit can be used as means of payment and rate dominating assets are available to serve as stores of value. Two factors are found to be crucial in making money valuable in this environment: the uncertainty in agents' consumption demand and the asymmetric information in credit arrangements. In general, the model economy can display a payment mechanism of money-only, credit- only, or mixed-use of money and credit in transactions, depending on the severity of the information asymmetry. Comparisons are also made between our approach and other standard monetary models.

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E95-35
Yong Wang
Asymmetric Information in an Overlapping Generations Economy
September 1995

This paper studies a pure-exchange overlapping generations economy in which agents have asymmetric information pertaining to their income realizations. The cost of state verification by lenders induces loan contracts which imply incomplete insurance on agent's future income, in an environment where aggregate uncertainty is absent. The lack of full insurance results in higher savings by agents, which in turn might convert otherwise "classical" economies into "Samuelsonian" ones. Overall, we show that the introduction of such information asymmetry can drastically alter the equilibrium properties of the analogous model with perfect information.

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E95-36
Catherine C. Eckel, Doug Eckel, and Vijay Singal
Privatization and Competition: Industry Effects of the Sale of British Airways and Air Canada
August 1995

Previous studies find that accounting measures of firm profitability improve after privatization, but fail to consider that contemporaneous changes in factors other than ownership may distort these measures. Thus it is not clear whether the observed improvement in firm performance is due to a change in ownership, or an artifact of some other factor such as altered reporting incentives of managers, revision of the objective of the firm to remove socio-political considerations, or changes in the competitive environment in which the firm operates. In this paper, we examine the effect of privatization using market-based data instead of accounting data, and focus on the effect of privatization on market performance rather than the profitability of the firm itself. Our methodology examines stock prices of competing firms, as well as output prices in the affected markets. We analyze the privatization of Air Canada and British Airways, concentrating on international routes where these carriers compete with U. S. airlines. We find that stock prices of the U.S. competitors of British Airways fell significantly upon the final announcement of the sale of its shares, while those of Air Canada did not. Abnormal stock returns are related to the extent of a competitor's rivalry with the privatized firm: the U. S. competitors of Air Canada, whose sales in the Canadian market are a small fraction of revenues, are not significantly affected. We also find that airfares in markets served by both carriers fell significantly when control passed from government to private hands. In contrast, we find no significant change in airfares when control continued in government hands, as with the first sale of Air Canada. The results imply that a change from government to private ownership improves economic efficiency, benefiting consumers through lower prices.

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E95-37
Catherine C. Eckel and Philip J. Grossman
Equity and Fairness in Economic Decisions: Evidence from Bargaining Experiments
April 1995

"Economic man", that fully-rational agent who maximizes his own monetary payoffs without regard to the well-being of others, figures prominently in economic theory. However, economists increasingly recognize the role of considerations of fairness in motivating human behavior. Fair behavior is apparent in the results of many economics laboratory experiments, especially in settings where subjects bargain over a fixed or variable payoff amount. But principles of fairness are not alone responsible for the allocations we observe. Consistent with the predictions of economic theory in other arenas, we might expect the extent of fair behavior to depend upon its price. The more costly it is to engage in fair behavior, the less appealing it becomes. Psychologists discuss allocation decisions in the context of equity theory. According to this theory, distribution of a payoff amount depends on characteristics of the players, as well as their contribution to the production of the payoff amount. The role of personal characteristics in allocation decisions has been largely ignored by economists. We report the results of experiments designed to explore the role of personal characteristics of players and the price of fairness in determining the allocation of a fixed pie. The size of the pie is independent of players' actions, allowing us to focus on the role of the characteristics of the players apart from their contributions to production. Our hypothesis is that fair behavior depends on the "deservingness" of the players, and that less fair behavior will be observed as its price increases. Thus we argue that fairness is like a commodity, and responds in much the same way other commodities respond to product characteristics and price. In our experiments we vary the "deservingness" of the recipient, and the "price" of fairness. We find that the outcome of bargaining games respond to both factors. A significant increase in donations occurs when we substitute an established charity for an anonymous recipient; status positively affects allocations; and sex affects the behavior of the players. These results are consistent with psychologist's ideas of equity. Furthermore, the demand for fairness is downward-sloping. Our results suggest that fairness enters the utility functions of subjects in much the same way that commodities do. Considerations of fairness do not invalidate economic theory; rather, subjects are economic in the way they incorporate fairness into their decisions.

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E95-38
Sheryl B. Ball, Catherine C. Eckel, Philip J. Grossman, and William Zame
Status in Markets
September 1995

We test the hypothesis that status affects economic outcomes in a market setting with competition. The experiments we report are double oral auction markets with a "box design", where any of a range of prices can be an equilibrium in the market. Half of the subjects are awarded "stars" on the basis of an economics quiz and allocated to a high-status group. In one treatment, the subjects on the buyer side of the auction market have status; in the other treatment, subjects on the seller side of the market have status. Our results show that the high-status side of the market benefits from its status. Prices are significantly higher when sellers have status than when buyers have status. Subjects who earn stars generally have higher earnings in the experiment. Our results are consistent with experiments in social psychology that show a positive reward for status in a situation where a fixed amount must be allocated over a group of subjects with different characteristics. However, our experiments are more convincing because, unlike the psychology experiments, our subjects' decisions affect their earnings: decisions are salient in money. Since artificially-induced status has a measurable effect on the outcome of experimental markets, we expect that "real" status may affect the outcome in some markets.

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E95-39
Sheryl B. Ball, Catherine C. Eckel, and Philip J. Grossman
Status as a Coordination Device in Battle-of-the-Sexes Games
September 1995

Status affects decision-making of agents in many different economic settings. In this paper, we focus on the role of status in equilibrium selection. Our hypothesis, which is grounded in "status characteristics theory" in psychology, is that differential status will allow subjects to better coordinate their behavior in games with multiple equilibria, and that the equilibrium which favors the high-status player(s) is more likely to be chosen. We present the results of a series of Battle-of-the-Sexes experiments. We vary the payoff structure and the status manipulation to illustrate the power of status as a coordination device. We show that the equilibrium which favors the high-status player is chosen about twice as frequently, on average, as the equilibrium which favors the low-status player, and this difference becomes more pronounced as the game is repeated.

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E95-40
Catherine C. Eckel and Robert P. Gilles
Fairness in Ultimatum Bargaining with Outside Options: Experimental Evidence
April 1995

Results of ultimatum bargaining experiments show a persistence of behavior that deviates from Nash equilibrium predictions. In addition to strategic considerations, many have attributed these results to a taste for fairness on the part of subjects. We investigate this concept by introducing an outside option for proposers in the game. We find that the outcome of the experiment varies systematically with the size of the outside option. Our interpretation of these results is that subjects' notion of what is fair depends on the decision environment. Results are consistent with classical axiomatic bargaining solutions for the game situation: outside options change the disagreement outcome, and subjects essentially divide evenly the dividend associated with reaching agreement.

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E95-41
Hyungtaik Ahn and Thomas M. Stoker
Semiparametric Estimation of Average Derivatives using Local Polynomial Regression
September 1995

In index models, the average derivatives of a general regression function are of practical interest because they are proportional to the index coefficients. This paper obtains an estimator of the average derivative by averaging the slope estimates of the local polynomial regression fit. We show that the estimator is root-N-consistent and has a limiting normal distribution. The asymptotic variance is same as the one obtained by Hardle and Stoker (1989). The present approach is different from Hardle and Stoker (H&S) at least in the following two ways: First, we estimate the average derivative directly, while H&S estimate it indirectly using a product moment representation. Second, our estimate does not require using a higher-order kernel. It is well known that the higher order kernel is often troublesome in small sample applications.

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E95-42
Paul Rhode and Mark Stegeman
Evolution Through Imitation (with applications to duopoly)
September 1995

If strategy choices in a symmetric two-player repeated game follow a stochastic Darwinian process (imitation of success), then they cluster around a point that is typically not a one-shot Nash equilibrium, and which is invariant under a broad class of transformations of the strategy space (e.g., Bertrand vs. Cournot). We derive implications for differentiated duopoly, including: the evolution of objectives consistently distorts behavior toward revenue maximization (unlike the distortions induced by Nash selection of objectives), and the distortion increases in "good times" of high demand and low costs. Undifferentiated Cournot duopolists evolve to maximize social surplus instead of profits.

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E95-43
Ian Gale and Mark Stegeman
Sequential Auctions of Endogenously Valued Objects
September 1995

Two completely informed but potentially asymmetric actors buy or sell identical "claims" in sequential auctions. After the auctions, they receive monetary prizes that are arbitrary functions of the final allocation of claims. Iterated elimination of weakly dominated strategies leaves a unique Nash equilibrium. Regardless of the schedule of prizes, equilibrium prices weakly decline as the auctions progress, and points of strict decline have a simple characterization. For one class of prize schedules, which arises naturally if duopolists bid for a scarce input, the equilibrium is completely characterized; many historical allocations generate the same final allocation.

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E95-44
Mark Stegeman
Near-Walrasian Equilibria of a Model with Advertising and Search
September 1995

Suppose that small homogeneous firms advertise their prices to small heterogeneous consumers, who also search for low prices. Search may be guided, meaning that searchers are more likely to find low-priced firms. This paper shows that the market's equilibria are Walrasian in the limit as search costs vanish, resolving Diamond's (1971) paradox. The paper also surveys other responses to the paradox, derives other properties of the limiting equilibria, and shows that every firm advertises too little if search costs are large, but too much if search costs are small.

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E95-45
Ian Gale, Don Hausch, and Mark Stegeman
Sequential Procurement Auctions
September 1995

We study procurement auctions in which one or more buyers let contracts sequentially. In equilibrium, one bidder typically wins all of her units in an unbroken sequence, followed by a shorter sequence of victories by the other bidder. The sequence of equilibrium prices is increasing. Although the sequential auction has a lower aggregate cost of production than the corresponding winner-take-all auction, for a large class of cost functions it has a greater total cost to the buyers. The outcome of the sequential auction is typically inefficient, so there are ex post gains from subcontracting. If subcontracting is allowed, then there are only two possible outcomes in the auction -- either one bidder wins all of the auctions or the bidders split the auctions evenly. The possibility of subcontracting can make both bidders and procurers strictly better off, but it can also make the bidders strictly worse off. The winner-take-all auction has a weakly lower total cost for the buyers, if subcontracting can occur, for the same class of cost functions.

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E95-46
Ian Gale and Mark Stegeman
Optimal Handicapping in All-Pay Auctions
September 1995

A seller must sell an object through an all-pay auction, but he can handicap the outcome (i.e., set participation fees). He chooses the handicaps after observing private signals for the buyers' valuations, and each buyer bids after observing all buyers' valuations and handicaps. We characterize the revenue- maximizing handicaps.

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E95-47
Mark Stegeman
Rationalizability in Extensive Forms
September 1995

Pearce's definition of rationalizability for extensive form games admits paradoxes, and this paper proposes amendments that solve these problems. It is shown that the order of deletion of strictly dominated strategies does not matter in finite games, but it may matter in infinite games; ambiguities in infinite games can be avoided by placing a weak bound on the rate of deletion. The latter results apply also to normal form games. Unlike most refinements, rationalizability applies directly to infinite games. The matrix form, a representation combining elements of the extensive and agent normal forms, implements rationalizability in finite extensive games. Interpretation within the matrix form suggests that some conventional equilibrium dominance arguments are unreasonable.

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E95-48
Mark Stegeman
Monopoly Pricing with Visiting Cost
September 1995

This paper shows that the conjunction of small visiting costs and marginal consumers (consumers who may choose to buy nothing) has previously unexplored implications for monopoly pricing. In a one-period model with random costs, prices are higher and stickier than predicted by the textbook model of monopoly. Prices are stickiest when the low tail of the cost distribution is short and when consumers are better-informed about the firm's product.

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E95-49
Anthony Dziepak
Spatial Competition with Incomplete Information
November 1995

{Abstract not available yet}

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E95-50
Anthony Dziepak
More Firms in Hotelling's "Stability in Competition"
November 1995

{Abstract not available yet}

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E95-51
Teyu Chou
Product Differentiation with Sequential Entry in a Two-Dimensional Space
November 1995

A model of two-dimensional product differentiation in which sequential entry occurs and the potential entrant outperforms the incumbent in innovating a new dimension is analyzed. For a three-stage entry- variety-price duopoly, a unique subgame-perfect equilibrium is obtained and is fully characterized. Most importantly, the entrant will completely utilize its capacity to innovate and achieve the principle of maximum differentiation with respect to the innovated variety. However, it is shown that with a sequentially growing product market, firms will not choose extreme opposite positions in all dimensions in order to soften price competition: the principle of minimum differentiation persists with respect to the traditional variety.

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E95-52
Richard Ashley
Non-Nested Model Selection/Validation: Making Postsample Inference More Credible
December 1995

The model selection and Granger-causality literatures have generally focused on insample rather than postsample hypothesis testing. This is due, in large part, to the fact that feasible postsample model validation periods are usually (perhaps necessarily) quite short, whereas large-sample methods are ordinarily required in order to deal with the serial correlation, crosscorrelation, and non-Gaussianity typically found in postsample forecast error series. This paper describes a re- sampling based postsample inference procedure which enhances the credibility of the inference significance levels it produces by explicitly estimating the uncertainty which its own large-sample approximation induces in these levels. For a given target level of inferential precision e.g., significance at the 5% level this procedure also provides explicit estimates of both how strong the postsample forecasting efficiency evidence in favor of one of two models must be (for a given length postsample period) and how long a postsample period is necessary, if the evidence is of given strength. These results indicate that postsample model validation periods substantially longer than the 5 to 20 periods typically reserved in past studies are necessary in order to credibly detect 20% - 30% MSE reductions. This approach also quantifies the inferential impact of different forecasting efficiency criterion choices e.g., MSE vs. MAE vs. asymmetric criteria and the use of expected loss differentials (as in Diebold and Mariano (1995)) vs. ratios of expected losses. The value of the procedure is illustrated using postsample forecasting error data from Ashley, Granger, and Schmalensee (1980), in which evidence is presented for unidirectional Granger-causation from fluctuations in aggregate U.S. consumption expenditures to fluctuations in U.S. aggregate expenditures on advertising.

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E95-53
Robert P. Gilles, Hans H. Haller and Pieter H. M. Ruys
Semi-Core Equivalence
December 1995

Core equivalence theory aims to identify the conditions under which Edgeworthian barter processes lead exactly to the Walrasian market equilibrium allocations, i.e., circumstances where non-market barter trade yields the same equilibrium allocations as a perfectly competitive market mechanism. The main structural requirements for core equivalence are largeness of the economy and the freedom to form almost arbitrary coalitions in the Edgeworthian barter processes. In this paper we investigate whether constraints on coalition formation and coalitional barter affect the equivalence result in significant ways. Our notion of the semi-core imposes a restriction on the collection of formable coalitions that does not affect the fundamental equivalence property. On the other hand, additional constraints on coalitional barter - as stipulated by our notion of the contract-core - can only be alleviated within an environment with sufficiently many formable coalitions: besides a contract-core equivalence theorem we show certain non- equivalence results.

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E95-54
Nicolaas J. Vriend
Is the Study of Complex Adaptive Systems Going to Solve the Mystery of Adam Smith's `Invisible Hand' ?
December 1995

This essay starts with the observation that the central problems of economic theory have remained the same since Adam Smith: How, why, and when does the `invisible hand' work? We argue that the recently developed framework of the study of `complex adaptive systems' may help address these types of questions.

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E95-55
Sumru Altug, Richard Ashley and Douglas M. Patterson
Are Technology Schocks Nonlinear?
December 1995 (revised February 1996)

This paper examines the behavior of postwar real US GDP growth and the associated Solow residual for the presence of nonlinearities in their generating mechanisms. For this purpose, it implements three different statistical tests: The McLeod-Li test based on the correlogram of the squared data, the BDS test, and the Hinich bicovariance test based on the third order moments of the data. We find substantial evidence that the generating mechanism of GDP growth is nonlinear but no evidence for nonlinearity in the Solow residual. This result implies that it is the macroeconomy itself which is nonlinear -- not the factor productivity (technology) shocks that are impinging on it.

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