Social Systems Research Institute
The University of Wisconsin - Madison
Room 6470 Social Science Building - 1180 Observatory Drive
Madison, Wisconsin 53706 U.S.A.
Phone: (608)262-0446
Fax: (608)263-3876
Electronic Mail: ssri@facstaff.wisc.edu
9513R A POSITIVE MODEL OF GROWTH AND POLLUTION CONTROLS Jones, Larry E. and Rodolfo E. Manuelli (revised March 1997)A recent concern in economics is the interplay between income and pollution. The main question raised is whether or not continued environmental degradation is a necessary part of the process of industrialization. Will pollution continue to increase without bound as more and more countries pass through the development phase or will it be controlled? Intuitively, if "clean air" is a normal good, we would expect that societies might be "self- regulating" in the sense that as income increases, pollution controls also increase. However , this intuition is somewhat misleading as the presence of external effects is an essential feature of environmental regulation.
This paper describes a growth model in which pollutants are internal to a jurisdiction. To this end we develop a model of the joint determination of the rate of development of the economy through market interactions and the extent of pollution regulation through collective decision making. We show that depending on the collective decision making mechanism in place, the time path of pollution can display an inverted U shape, a "sideways mirrored" S, or an increasing (but bounded) level over time.
In addition to the theoretical analysis of the relationship between pollution and growth, this paper contributes to the literature on both the large differences in income per capita across countries as well as the discrepancies in their growth rates. It shows that by relying in collective decision making mechanisms to choose policies, the dynamics of convex models can resemble those usually ascribed to models of multiple equilibria. Download 9513R in PDF.
9529R EVOLUTIONARY DRIFT AND EQUILIBRIUM SELECTION Binmore, Ken and Larry Samuelson (revised June 3, 1997)This paper develops an approach to equilibrium selection in game theory based on studying the learning process through which equilibrium is achieved. The differential equations derived from models of interactive learning typically have stationary states that are not isolated. Instead, Nash equilibria that specify different out-of- equilibrium behavior appear in connected components of stationary states. The stability properties of these components can depend critically on the perturbations to which the system is subjected. We argue that it is then important to incorporate such drift into the model. A sufficient condition is provided for drift to create stationary states, with strong stability properties, near a component of equilibria. Applications to questions of forward and backward induction are developed.
9609R THE OPTIMAL MECHANISM FOR SELLING TO BUDGET-CONSTRAINED CONSUMERS Che, Yeon-Koo and Ian Gale (revised February 1997)This paper finds an optimal mechanism for selling an indivisible good to consumers who may be budget-constrained. Unlike the case where buyers are not budget-constrained, a single posted price is not typically optimal. An optimal mechanism generally consists of a continuum of lotteries indexed by the probability of consumption and the lump-sum fee.
9610R TAX COMPLIANCE Andreoni, James, Brian Erard and Jonathan Feinstein (revised December 1996)This paper provides a review of the major findings in the economics literature on tax compliance. It focuses exclusively on the personal income tax, examining both the theory and the empirical work on enforcement and compliance with the tax laws. Download 9610R , revised July 1997.
9612R ALTRUISTS, EGOISTS AND HOOLIGANS IN A LOCAL INTERACTION MODEL Eshel, Illan, Larry Samuelson and Avner Shaked (re-revised March 29, 1997)We study a population of agents, each of whom can be an Altruist or an Egoist. Altruism is a strictly dominated strategy. Agents choose their actions by imitating others who earn high payoffs. Interactions between agents are local, so that each agent affects (and is affected by) only his neighbors. Altruists can survive in such a world if they are grouped together, so that the benefits of altruism are enjoyed primarily by other Altruists, who then earn relatively high payoffs and are imitated. Altruists continue to survive in the presence of mutations that continually introduce Egoists into the population.
9620R TRADE AND THE TRANSMISSION OF TECHNOLOGY Keller, Wolfgang (revised March 2, 1997)No abstract.
9701 TRADE PATTERNS, TECHNOLOGY FLOWS, AND PRODUCTIVITY GROWTH Keller, Wolfgang (January 1997)This paper presents a model of international trade in differentiated intermediate goods. Because intermediates are invented through costly R&D investments, employing foreign intermediates implies sharing the return to R&D with the inventor country. I first derive a relation of how domestic productivity is related to foreign R&D investments. In the subsequent empirical analysis, industry level data for eight OECD countries between 1970-91 is used to estimate that relation. The robustness of interpreting empirical findings is emphasized, to which effect I employ Monte-Carlo techniques, and the part of international R&D spillovers that is related to trade is quantified. I find evidence, first, that domestic and foreign R&D affect productivity differently, in contrast to assuming symmetric effects. Second, the productivity effects resulting from R&D vary substantially by which country conducts the R&D. Third, I find that the composition of a country's import partners does not significantly affect the estimated effect from foreign R&D, indicating a large component in the benefit from foreign R&D which is not related to trade. Lastly, I estimate that international trade contributes about 20% to the total productivity effect from foreign R&D.
9702 AUCTIONS WITH RESALE MARKETS: AN APPLICATION TO U.S. FOREST SERVICE TIMBER SALES Haile, Philip A. (December 16, 1996)This paper presents a model of auctions with resale which is then applied to sales of timber harvesting contracts held by the U.S. Forest Service. After a contract is sold, there is often a considerable delay before harvesting must begin, and each firm's uncertainty regarding the value it places on the contract may be resolved in the interim. Because contracts can be transferred in some circumstances and can always be subcontracted, bidding may reflect the presence of a resale market in which the ex post gains to trade can be exploited. An analysis of the data yields results which support the predictions of the model. First, controlling for selection of the auction mechanism, first-price sealed bid auctions yield revenues which are at least as high as those from English auctions prior to policy changes which may have made resale more difficult and less important. This ranking is strict in one of the two regions studied. Second, individual bids in English auctions increase in the number of bidders. Neither of these results is consistent with the models of auctions without resale underlying previous empirical studies of timber auctions, and the latter result is inconsistent with any known noncooperative model of auctions without resale. Download 9702.
9703 A MONTE CARLO STUDY OF EC-ESTIMATION IN PANEL DATA MODELS WITH LIMITED
DEPENDENT VARIABLES AND HETEROGENEITY
El-Gamal, Mahmoud A. and David M. Grether (March 1997)
The EC (Estimation-Classification) estimator, and its companion EC-algorithm, were introduced in El-
Gamal and Grether (1995), and their properties further analyzed in El-Gamal and Grether (1996). The purpose of
EC estimation is to uncover heterogeneity in panel data models in a manner which is more parsimonious and
computationally less costly than some of the standard methods (e.g. fixed effects). The latter concern is particularly
evident in limited dependent variable models where no simple method of estimating fixed effects is available (e.g.
probits). One of the applications of El-Gamal and Grether (1996) employed the EC algorithm to estimate multiple
probits in a population of 257 individuals, each being observed for 14 to 19 periods, providing very satisfactory
results. Since the asymptotic theory behind EC estimation relies on " Large T " approximation (i.e. we require T increasing to infinity, then n increasing to infinity in proving consistency of the estimator), we provided a diagnostic statistic (called the Average
Normalized Entropy (ANE) for diagnosing the adequacy of the large T approximation. In this paper, we provide a
Monte Carlo analysis of the EC estimator in comparison to pooling, and fixed effects (pooled slopes) estimators.
The results show that for T as small as 3, the EC-estimator does significantly better than fixed effects estimators in
unpoolable slope environments, and almost as well as in the poolable slopes case. As T gets larger the EC
estimator's performance becomes progressively superior, with T = 20 providing virtually perfect estimation of the
number of types, what the types are, and the classification of individuals to types. The ANE statistic is found to
provide a very useful indicator of the proportion of possible misclassifications. Download 9703 in PDFor in PostScript.
9704 A BAYESIAN INTERPRETATION OF EXTREMUM ESTIMATORS
El-Gamal, Mahmoud A. (First Draft: December 1991; Revised: February 14, 1997)
Extremum estimation is typically an ad hoc semi-parametric estimation procedure which is only justified on
the basis of the asymptotic properties of the estimators. For a fixed finite data set, consider a large number of
investigations using different extremum estimators to estimate the same parameter vector. The resulting empirical
distribution of point estimates can be shown to coincide with a Bayesian posterior measure on the parameter space
induced by a minimum information procedure. The Bayesian interpretation serves a number of purposes ranging
from lending legitimacy to the use of those procedures in small sample problems, to helping prove asymptotic
properties by reference to Bayes central limit theorems, to laying a foundation for combining point estimates from
various extremum estimation experiments for statistical decision processes. Download 9704 in PDFor in PostScript.
9705 CAN ISLAMIC BANKING SURVIVE? A MICRO-EVOLUTIONARY PERSPECTIVE
El-Gamal, Mahmoud A. (February 21, 1997)
Islamic banking is a growing phenomenon which came into existence to satisfy the financial needs of
devout Muslims who observe the prohibition of interest-based transactions. Many economists have studied the
macroeconomic properties of this institution in the framework of an isolated and ideal Islamic economy. In this age
of integrated global financial markets, the instantaneous transformation of an entire financial sector to profit-and-loss
sharing is very unlikely. I present an evolutionary game-theoretic model in which devout Muslims, regular interest-
based banks, and "weak" (hybrid) muslims/banks interact. The third type of agents is intended to represent the
behavior of current Islamic banking, which is commonly criticized for mimicking interest-based systems. It is shown
in this model that a critical initial mass of the "weak" types is necessary for the survival of the devout agents in a
heterogeneous environment. Moreover, it is shown that the survival of the devout agents is predicated on the
islamically-"weak" agents acting among themselves in an Islamic way. When the islamically-"weak" agents act in an
Islamic way among themselves, it is shown that their existence is necessary and sufficient for Islamic banking to
survive! Download 9705 in PDFor in PostScript.
9706 MODELS OF COMPLEXITY IN ECONOMICS AND FINANCE
Brock, William A. and Cars H. Hommes (April 1997)
No Abstract. Download WP#9706 in PDF.In C. Heij, J. M. Schumacher, B. Hanzon and C. Praagman, (editors), System Dynamics in Economic and Financial Models, John Wiley & Sons, pp. 3-41.
9707 A FORMAL MODEL OF THEORY CHOICE IN SCIENCE
Brock, William A. and Steven N. Durlauf (April 8, 1997)
Since the classic work of Feyerabend and Kuhn, the role of social factors in the scientific enterprise has
been a major concern in the philosophy and history of science. In particular, the presence of social factors such as
the desire for prestige or pressures to conform to accepted ideas, have been regarded as reasons to question whether
science naturally progresses towards more and more accurate approximations of reality. In this paper, we propose a
formal model of theory choice which incorporates private and social influences. We provide a characterization of
the interaction of social factors with theory choice. Our results demonstrate that the influence of social factors on
scientific progress is far more complex than is typically assumed. In particular, we provide conditions under which
social influences actually enhance the rate at which a superior theory replaces its inferior predecessor. Further,
social interactions are shown to provide a theoretical model which is consistent with some broad empirical aspects
of the pattern of scientific theory evolution. Download WP#9707 in PDF.
9708 REPEATED BARGAINING WITH PERSISTENT PRIVATE INFORMATION
Kennan, John (April 1997)
The paper analyzes repeated contract negotiations involving the same buyer and seller where the contracts are linked because the buyer has persistent (but not fully permanent) private information. (The main application is labor contracts, where the employer has private information about the value of labor services sold by the union). The size of the surplus being divided is specified as a two-state Markov chain with transitions that are synchronized with contract negotiation dates. Equilibrium involves information cycles triggered by the success or failure of aggressive demands made by the seller. The main result characterizes a class of cyclic weak-Markov-Perfect equilibria. Download 9708.
9709 REFLECTIONS ON HOW ECONOMIC REASONING CAN CONTRIBUTE TO THE STUDY OF SCIENCE Durlauf, Steven N. (April 27, 1997)See revised version #9709R "Rational Choice and the Study of Science" October 1998.
9710 REGRESSION-BASED TESTS OF PREDICTIVE ABILITY West, Kenneth D. and Michael W. McCracken (May 1997)We develop regression-based tests of hypotheses about out of sample prediction errors. Representative tests include ones for zero mean and zero correlation between a prediction error and a vector of predictors. The relevant environments are ones in which predictions depend on estimated parameters. We show that standard regression statistics generally fail to account for error introduced by estimation of these parameters. We propose computationally convenient test statistics that properly account for such error. Simulations indicate that the procedures can work well in samples of size typically available, although there sometimes are substantial size distortions. Download WP#9710 in PDF.
9711 THE MEMBERSHIPS THEORY OF INEQUALITY: IDEAS AND IMPLICATIONS Durlauf, Steven N. (May 1997)No abstract. See revised version #9711R August 1997.
9712 TOWARD A THEORY OF CHARITABLE FUNDRAISING Andreoni, James (May 1997)Private providers of public goods, such as charities, invariably enlist a fundraiser to organize and collect contributions. Common in charitable fundraising during capital campaigns is seed money, either from a government grant or from a group of "leadership givers," that launches the fund drive and generates additional gifts. This paper provides a theoretical basis for fundraisers and seeds to charity. The primary assumption that is added to the standard model of privately provided public goods is simply that the charity has fixed costs. With this it is shown that fundraisers have a natural and important role, and that sometimes only a small amount of seed money can grow into a substantial charity. Download 9712.
9713 ON THEORIES EXPLAINING THE SUCCESS OF THE GRAVITY EQUATION Evenett, Simon J. and Wolfgang Keller (June 1997)Examining the accuracy of the monopolistic competition theory's predictions for import volumes, we assess whether this theory accounts for the empirical success of the gravity equation. Since certain factor- endowment based theories have the same prediction for import volumes, we employ resampling techniques to address this model identification problem. We use extraneous information on the allocation of factor endowments in a given sample to identify which model is driving trade flows. We find that the accuracy of the monopolistic competition theory's prediction improves in samples where the factor endowment allocations generate a higher share of differentiated goods trade. By an analogous criterion, the Heckscher-Ohlin models make a much less accurate prediction. We conclude that the monopolistic competition theory is more likely to account for the gravity equation's success, especially in explaining trade among industrial nations.
9714 COOPERATIVE INVESTMENTS AND THE VALUE OF CONTRACTING Che, Yeon-Koo and Donald B. Hausch 1st: April 1996; This version: June 1997.Several recent articles have shown that the efficient outcome for bilateral trade, even in the face of specific investments and incomplete contracting, can be supported with appropriately-designed contracts. These studies have, for the most part, restricted attention to so called "selfish" investments that benefit the investor (e.g., the seller's investment reduces her cost of producing the good). We find very different results for "cooperative" investments that directly benefit the investor's partner (e.g., the seller's investment improves the buyer's value of the good). If the parties can commit not to renegotiate, schemes exist that can achieve the efficient outcome as a subgame perfect equilibrium. However, if such commitment is not possible and the investments have sufficientlycooperative elements, then not only is the efficient outcome unachievable (regardless of whether one or both parties invest), but the parties can do no better than to abandon contracting altogether in favor of ex post negotiation. Download 9714 in PDFor in PostScript.
9715 POLICY UNCERTAINTY AND INFORMATIONAL MONOPOLIES: THE CASE OF MONETARY POLICY Jones, Larry E. and Rodolfo E. Manuelli;This version: June 1997; First: April 1995
No Abstract. Download 9715 in PDF.
9716 A CONSISTENT NONPARAMETRIC TEST OF ERGODICITY FOR TIME SERIES WITH APPLICATIONS Domowitz, Ian and Mahmoud A. El-Gamal July 1997We propose a set of algorithms for testing the ergodicity of empirical time series, without reliance on a specific parametric framework. It is shown that the resulting test asymptotically obtains the correct size for stationary and nonstationary processes, and maximal power against non-ergodic but stationary alternatives. The test will not reject in the presence of nonstationarity that does not lead to ergodic failure. The work is linked to recent research on reformulations of the concept of integrated processes of order zero, and we demonstrate the means to operationalize new concepts of "short memory" for economic time series. Limited Monte Carlo evidence is provided with respect to power against the non-stationary and non-ergodic alternative of unit root processes. The method is used to investigate debates over stability of monetary aggregates relative to GDP, and the mean reversion hypothesis with respect to high frequency data on exchange rates. The test also is applied to other macroeconomic time series, as well as to very high frequency data on asset prices. Both the Monte Carlo and data analysis results suggest that the test has very promising size and power performance.
446
Bollinger, Christopher R.
BOUNDING MEAN REGRESSIONS WHEN A BINARY REGRESSOR IS MISMEASURED
Journal of Econometrics, Volume 73, pp. 387-399, 1996.
447
Brock, William A. and Pedro J.F. de Lima
NONLINEAR TIME SERIES, COMPLEXITY THEORY, AND FINANCE
Handbook of Statistics, G.S. Maddala and C.R. Rao, eds, Volume 14, Chapter 11, pp. 317-361, Elsevier Science B.V. 1996.
448
LeBaron, Blake
CHAOS AND NONLINEAR FORECAST-ABILITY IN ECONOMICS & FINANCE
Chaos and Forecasting: Proceedings of the Royal Society Discussion Meeting, H. Tong, editor, World Scientific, Singapore, 1995, pp. 129-143. Originally appeared in Philosophical Transactions of the Royal Society of London (A), 348, pp 397-404,1994.
449
Durlauf, Steven N.
ASSOCIATIONAL REDISTRIBUTION: A DEFENSE
Politics & Society, Vol. 24, No. 4, pp. 391-410, December 1996.
450
Durlauf, Steven N.
AN INCOMPLETE MARKETS MODEL OF BUSINESS CYCLES
Computational and Mathematical Organization Theory, 2:3, pp. 197-218, 1996.
451
Durlauf, Steven N.
LIMITS TO SCIENCE OR LIMITS TO EPISTEMOLOGY?
Complexity, Vol. 2, No. 3, pp. 31-37, 1997.
452
Durlauf, Steven N.
NEIGHBORHOOD FEEDBACKS, ENDOGENOUS STRATIFICATION, AND INCOME INEQUALITY
Dynamic Disequilibrium Modeling, Chapter 18, pp. 505-534, Barnett, Gandolfo and Hillinger, editors, Cambridge University Press, 1996.
453
Keller, Wolfgang
TECHNOLOGY FLOWS BETWEEN INDUSTRIES: IDENTIFICATION AND PRODUCTIVITY EFFECTS
Economic Systems Research, Vol. 9, No. 2, pp. 213-220, 1997.