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We examine contemporaneous perfect epsilon-equilibria, in which a player's actions after every history, evaluated at the point of deviation from the equilibrium, must be within epsilon of a best response. This concept implies, but is stronger than, Radner's ex ante perfect epsilon-equilibrium. A strategy profile is a contemporaneous perfect epsilon-equilibrium of a game if it is a subgame perfect equilibrium in a perturbed game with nearly the same payoffs, with the converse holding for pure equilibria.
Keywords: Epsilon equilibrium, ex ante payoff, multistage game, subgame perfect equilibrium.
JEL classification numbers: C70, C72, C73.
Download WP 2002-5R in pdf.
We study the long-run sustainability of reputations in games with imperfect public monitoring. It is impossible to maintain a permanent reputation for playing a strategy that does not play an equilibrium of the game without uncertainty about types. Thus, a player cannot indefinitely sustain a reputation for non-credible behavior in the presence of imperfect monitoring.
JEL classification numbers: C70, C78.
Keywords: Reputation, Imperfect Monitoring, Repeated Games, Commitment, Stackelberg types.
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This paper explores the state of interplay between recent efforts to introduce complex systems methods into economics and the understanding of empirical phenomena. The empirical side of economic complexity may be divided into three general branches: historical studies, the identification of power and scaling laws, and analyses of social interactions. I argue that, while providing useful "stylized facts," none of these empirical approaches has produced compelling evidence that economic contexts exhibit the substantive microstructure or properties of complex systems. This failure reflects inadequate attention to identification problems. Identification analysis should therefore be at the center of future work on the empirics of complexity.
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The convergence hypothesis has been at the forefront of empirical growth research for over a decade. This paper provides a critical overview of this literature. I argue that statistical tests for convergence have failed to address the notion of convergence in an economically interesting sense. I propose some new directions for empirical research that, by focusing more explicitly on cross-country heterogeneity in the growth process, have the potential to provide a better understanding of convergence as an economic phenomenon.
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The paper develops a tractable econometric model of optimal migration, focusing on expected income as the main economic influence on migration. The model improves on previous work in two respects: it covers optimal sequences of location decisions (rather than a single once-for-all choice), and it allows for many alternative location choices. The model is estimated using panel data from the NLSY on white males with a high school education. Our main conclusion is that interstate migration decisions are influenced to a substantial extent by calincome prospects. On the other hand we find no evidence of a response to geographic differences in wage distributions. Instead, the results suggest that the link between income and migration decisions is driven by a tendency to move in search of a better locational match when the income realization in the current location is unfavorable.
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The relationship between economic growth and the environment is not well understood: we have only limited understanding of the basic science involved and very limited data. Because of these difficulties it is especially important to develop a series of relatively simple theoretical models that generate stark predictions. This paper presents one such model where societies implement "the Kindergarten rule of sustainable growth." Following the Kindergarten rule means implementing zero emission technologies in either finite time or asympotically. The underlying simplicity of the model allows us to provide new predictions linking the path of environmental quality to pollutant characteristics (stock vs. flows; toxics vs. irritants) and primitives of the economic system. It also provides a novel Environmental Catch-up Hypothesis.
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We develop a conceptual framework for valuing biodiversity from an economic perspective. We consider biodiversity important because of a number of characteristics or services that it provides or enhances. We argue for a dynamic economic welfare measure of biodiversity that complements the existing literature on benefit-cost approaches and genetic distance/phylogenic tree approaches, which to date have been more static. Using a unified model of optimal economic management of an ecosystem under ecological and genetic constraints, we identify gains realized by management policies leading to a more diverse system, using the Bellman state valuation function of the problem. We show that a more diverse system could attain a higher value even though the genetic distance of the species in the more diverse system could be almost zero. We relate this endogenous measure of the biodiversity value to ecologically/biologically oriented biodiversity metrics (species richness, Shannon or Simpson indices).
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We study transactions that require investments before trading in a competitive market, when forward contracts fixing the transaction price are absent. We show that, despite the market being perfectly competitive and subject to arbitrarily little uncertainty, the inability to jointly determine investment levels and prices may make it impossible for buyers and sellers to predict the prices at which they will trade, leading to inefficient levels of investment and trade.
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The relationship between economic growth and the environment is not well understood: we have only a limited understanding of the basic science involved and very little data. Because of these difficulties it is especially important to develop a series of relatively simple theoretical models that generate stark predictions. This paper develops a simple endogenous growth model that matches the three most salient features of the growth and environment data. In addition to matching the facts it provides two new hypotheses: a set of predictions linking the path of environmental quality to pollutant characteristics (stocks vs. flows; toxics vs irritants) and a novel cross-country prediction we dub the Environmental Catch-up Hypothesis.
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This paper surveys the modern economics literature on the role of neighborhoods in influencing socioeconomic outcomes. Neighborhood effects have been analyzed in a range of theoretical and applied contexts and have proven to be of interest in understanding questions ranging from the asymptotic properties of various evolutionary games to explaining the persistence of poverty in inner cities. As such, the survey covers a range of theoretical, econometric and empirical topics. One conclusion from the survey is that there is a need to better integrate findings from theory and econometrics into empirical studies; until this is done, empirical studies of the nature and magnitude of neighborhood effects are unlikely to persuade those skeptical about their importance.
JEL codes: C25, I30, R00
Keywords: identification, neighborhood effects, stratification, segregation, multiple equilibria, networks
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Commodity bundling is studied in an environment where the dispersion of valuations unambiguously decreases when two or more goods are sold as a bundle only. Bundling is more likely to dominate separately selling the goods if marginal costs are low relative to the average valuation, or if the distribution of valuations is very peaked around the mean.
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