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
9601R GIVING ACCORDING TO GARP: AN EXPERIMENTAL STUDY OF RATIONALITY AND ALTRUISM Andreoni, James and John H. Miller (revised June 4, 1998)This paper asks whether altruistic choices can be captured in a simple neoclassical framework with well- behaved preferences for giving. We collect data with several different prices of altruism and verify that 96 percent of subjects make choices that are consistent with the Generalized Axiom of Revealed Preference. We estimate utility functions that could have generated the data, and then use these estimates to predict data from outside our experiment. We argue that this neoclassical approach to a demand for altruism can go a long way toward understanding many anomalous results in economic laboratory experiments, and can provide an empirical foundation for theoretical models of a direct demand for giving. Download WP#9601R in PDF.
9623R FROM SOCIALIST SHOWCASE TO MEZZOGIORNO? LESSONS ON THE ROLE OF TECHNICAL CHANGE FROM EAST GERMANY'S POST-WORLD WAR II GROWTH PERFORMANCE Keller, Wolfgang (revised May 1998)We focus on the relative contribution of technical change in determining differences in growth rates across economies by revisiting East Germany's growth performance relative to West Germany since World War II. Our estimates show, first, that during East Germany's socialist period, Eastern regions had on average a 33% lower rate of technical change than those in West Germany. Secondly, between 1991-1995, after German reunification, the rate of technical change in East German regions was six times as high as in West German regions on average. We emphasize both the level of domestic innovative activity as well as the extent of international technology diffusion through economic integration as the factors which held East Germany back during its socialist period, and which accelerate its catch-up now. These findings explain why East Germany was not the socialist showcase economy before reunification, and why it will not be Germany's Mezzogiorno, staying persistently behind West Germany as does Italy's South relative to its North. The results underline the need to identify, measure, and estimate the contribution of technical change as a source of growth independently from the accumulation of rival factor inputs also in studies of other economies.
9708R REPEATED BARGAINING WITH PERSISTENT PRIVATE INFORMATION Kennan, John (revised Dec 1998)The paper analyzes repeated contract negotiations involving the same buyer and seller where the contracts are linked because the buyer has the 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. A successful demand induces the seller to again make an aggressive demand in the next negotiation, because the buyer's acceptance reveals that the current surplus is large, and because there is persistence in the Markov chain generating the surplus. Rejection of an aggressive demand, on the other hand, leads the seller to be pessimistic about the size of the surplus in the next contract, so the seller makes a "soft" offer that is sure to be accepted. Then, several contracts later, the Markov chain has made enough transitions to make the seller optimistic enough to again make an aggressive demand, and the result of this demand re-starts the information cycle. An interesting feature of this cycle is that the soft price is not constant, but declines as the cycle continues, so as to offset the buyer's option value of re- starting the cycle when the current state is bad. An explicit mapping is given for the relationship between the basic parameters and the equilibrium prices and quantities; in particular, there is a closed-form solution for the threshold belief that makes the seller indifferent between hard and soft offers. Download WP9708R
9801 AUCTIONS WITH PRIVATE UNCERTAINTY AND RESALE OPPORTUNITIES Haile, Philip A. (December 22, 1997)This paper studies auctions held before bidders are sure of the values they place on the object for sale, leaving potential gains to subsequent resale trade. While important insights from models of auctions without resale carry over, equilibrium bidding can be fundamentally altered by the endogeneity of valuations and the informational linkages between primary and secondary markets. As a result, models ignoring resale may often misguide policy and interpretation of bidding data. Furthermore, results regarding players' incentives to signal through their bids, the effects of resale on auction revenues, an d revenue comparisons between standard auctions depend on the structure of the secondary market. Download WP#9801
9802 RISK DOMINANCE, PAYOFF DOMINANCE AND PROBABILISTIC CHOICE LEARNING Battalio, Raymond, Larry Samuelson and John Van Huyck (November 1997)This paper reports an experiment comparing three stag hunt games that have the same best-response correspondence. The games have the same expected payoff from the mixed equilibrium, but differ in the pecuniary incentive a player has to play a best response to other mixtures. In each game, risk dominance conflicts with payoff dominance and selects an efficient pure strategy equilibrium. We find statistically and economically significant evidence that the expected earnings difference helps explain observed behavior.
9803 THE NEW EMPIRICS OF ECONOMIC GROWTH Durlauf, Steven N. and Danny T. Quah (January 1998)We provide an overview of recent empirical research on patterns of cross-country growth. The new empirical regularities considered differ from earlier ones, e.g., the well-known Kaldor stylized facts. The new research no longer makes production function accounting a central part of the analysis. Instead, attention shifts more directly to questions like, Why do some countries grow faster than others? It is this changed focus that, in our view, has motivated going beyond the neoclassical growth model.
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9804 SIGNALING OF NEED: PARENT FITNESS LOSSES DETERMINE OFFSPRING COSTS Noldeke, Georg and Larry Samuelson (January 21, 1998)No Abstract. Download WP#9804 in PDF
9805 AN EVOLUTIONARY BOOTSTRAP METHOD FOR SELECTING DYNAMIC TRADING STRATEGIES LeBaron, Blake (December 1997)This paper combines techniques drawn from the literature on evolutionary optimizing algorithms along with bootstrap based statistical tests. Bootstrapping and cross validation are used as a general framework for estimating objectives out of sample by redrawing subsets from a training sample. Evolution is used to search the large space of potential network architectures. The combination of these two methods creates a network estimation and selection procedure which aims to find parsimonious network structures which generalize well. Examples are given from financial data showing how this compares to more traditional model selection methods. The bootstrap methodology also allows more general objective functions than ususal least squares since it can estimate the in sample bias for any function. Some of these will be compared with traditional least squares based estimates in dynamic trading settings with foreign exchange series.
9806 DIFFERENCE-FORM CONTESTS AND THE ROBUSTNESS OF ALL-PAY AUCTIONS Che, Yeon-Koo and Ian Gale (April 6, 1998)In much of the literature on contests, two families of contests are typically studied. They differ according to whether a contestant's probability of winning the prize depends on the ratio of his effort to his rivals' efforts or on the difference. We study the latter family, characterizing equilibria for all parameter values for a particular class of "difference-form" contests. In so doing, we find similarities between general difference-form contests and all-pay auctions (which belong to both families), especially in terms of the possible "preemption" of low-valuation contestants. We conclude that the difference-form contest preserves important qualitative features of the equilibrium in the all-pay auction, by showing convergence of the equilibria to the latter.
9807 SSRI TRIENNIAL REPORT: July 1, 1994 - June 30, 1997Download SSRI Triennial, WP#9807 in PDF.
9808 OPTIMAL INCENTIVES FOR TEAMS Che, Yeon-Koo and Seung-Weon Yoo (May 1998)Much of the existing theory of incentives describes a static relationship that lasts for just one transaction. This static assumption is not only unrealistic, but the resulting predictions appear to be at odds with many work organizations. The current paper introduces possible long-term interaction among agents, and studies how the design of explicit incentives and work organizations can exploit, and interact with, the implicit incentives generated by the repeated interaction of the agents. The optimal incentive scheme is shown to display many observed features of the increasingly popular "teams," such as low-powered, group incentives, and the use of self monitoring and decentralization of authority among team members.
9809 THE SIMPLE ECONOMICS OF LABOR STANDARDS AND THE GATT Bagwell, Kyle and Robert W. Staiger (May 15, 1998)How should the issue of domestic labor standards be handled in the GATT/WTO? This question is part of a broader debate over the appropriate scope of international economic institutions such as the GATT (and now its successor, the WTO), where member-countries are considering proposals for a new round of negotiations that would move beyond GATT's existing focus on trade barriers and cover "domestic" issues such as labor and environmental standards and regulatory reform which have traditionally been treated with "benign neglect" within GATT. Such proposals encroach on traditional limits of national sovereignty, and they raise fundamental challenges to the existing structure of international economic relations among sovereign states. In this paper we consider several approaches to the treatment of domestic labor standards within a trade agreement. We use simple economic arguments to show that, while the benign neglect of labor standards within a trade agreement will result in inefficient choices for both trade barriers and labor standards, direct negotiations over labor standards are not required to reach efficient outcomes. Specifically, we describe two tariff negotiating structures that deliver efficient outcomes while preserving varying degrees of national sovereignty over policy choices. A first approach combines tariff negotiations with subsequent Kemp-Wan adjustments, under which each government is free to alter unilaterally its policy mix so long as trade volumes are not affected. A second approach adds to the first approach GATT's rule of reciprocity, under which subsequent to tariff negotiations each government is free to alter unilaterally its tariff, but its trading partner is then free to reciprocate with a tariff response that stabilizes export prices. We show that both approaches will deliver governments to the efficiency frontier, but that the second approach provides governments with greater sovereignty over their policy choices and bears a strong resemblance to the negotiating procedures spelled out in GATT.
9810 WHICH IS THE FAIR SEX? GENDER DIFFERENCES IN ALTRUISM Andreoni, James and Lise Vesterlund (May 25, 1998)The experimental evidence on gender differences in altruism has been mixed. While some have found women to be more altruistic than men, others have found the opposite result. We study contribution decisions in a modified dictator game with varying incomes an prices. Using this data we are able to determine the underlying preferences and can determine how the preference distribution may differ across gender. Our results indicate that the question "which is the fair sex?" has a complicated answer sometimes women can appear more altruistic and sometimes less. Stated differently, we find that the male and female "demand curves for altruism" cross. At high prices of altruism women demand more, at low prices men demand more, and at prices in between men and women are equally altruistic. Moreover, men seem to be more extreme. They are more likely to be both perfectly selfish and perfectly selfless, whereas women tend to be "equalitarians" who prefer to share evenly.
9811 PARTNERS VERSUS STRANGERS: THE EFFECT OF RANDOM REMATCHING IN PUBLIC GOODS EXPERIMENTS Andreoni, James and Rachel Croson (May 26, 1998)No abstract.
9812 SECTION 365, MANDATORY BANKRUPTCY RULES AND INEFFICIENT CONTINUANCE Che, Yeon-Koo and Alan Schwartz (June 5, 1998)Section 365 of the Bankrupt Code prohibits enforcement of the once common "ipso facto clause." The clause excuses the solvent party from performance of the contract when the other party becomes insolvent. We show that the ability of insolvent firms to continue bad projects is enhanced by the absence of ipso facto clauses. Without such a clause, the firm can exploit the inability of courts always to assess expectation damages accurately to compel a solvent party to stay in a bad deal. An ipso facto clause would preclude this outcome because the clause permits the solvent party to exit costlessly. Further, an ipso facto clause improves the managers' incentive to exert effort to avoid financial distress. These results have two broader implications. First, that the important mandatory rule regulating the ability of solvent parties to exit is inefficient suggests that the justifications for the Bankruptcy Code's other mandatory rules should be rethought. Second, under free contracting, the inefficient continuance of insolvent firms would be less of a problem than it now is because the ability of contract partners to withhold future performances sometimes would stop bad projects.
9813R ENDOGENOUS INEQUALITY IN INTEGRATED LABOR MARKETS WITH TWO-SIDED SEARCH Mailath, George J., Larry Samuelson and Avner Shaked (Feb. 2, 1999)We consider a market in which there are two types of workers, "red" and "green," where these labels have no direct payoff implications. Workers can choose to acquire costly skills. Skilled workers must search for firms with a job vacancy, while firms with vacancies also search for unemployed workers. A unique symmetric equilibrium exists in which firms ignore workers' colors. There may also exist an asymmetric equilibrium in which firms only search for green workers, more green than red workers acquire skills, skilled green workers receive higher wage rates than skilled red workers, and the unemployment rate is higher among skilled red than green workers, though there are more unemployed skilled green than red workers. Discrimination between ex ante identical individuals thus arises as an equilibrium phenomenon. Our analysis differs from previous models of discrimination in assuming that firms have perfect information about workers with whom they are matched, and strictly prefer to hire minority workers (contingent on meeting a worker), and in generating predictions concerning unemployment as well as wage rates.
9814 ANALYZING CHOICE WITH REVEALED PREFERENCE: IS ALTRUISM RATIONAL? Andreoni, James and John H. Miller (June 17, 1998)No abstract.
9815 AN ECONOMIC THEORY OF GATT Bagwell, Kyle and Robert W. Staiger (June 1998)Despite the important role played by GATT in the world economy, economists have not developed a unified theoretical framework that interprets and evaluates the principles that form the foundation of GATT. Our purpose here is to propose such a framework. Working within a general equilibrium trade model, we represent government preferences with a very general formulation that includes the traditional case in which governments maximize national income as well as the possibility emphasized in leading political-economy models that governments are concerned with the distributional implications of their tariff choices. Using this general framework we establish that GATT's principles of reciprocity and nondiscrimination (MFN) can be viewed as simple rules that assist governments in their effort to implement efficient trade agreements. From this perspective, we argue that preferential agreements undermine GATT's ability to deliver efficient multilateral outcomes.
9816 CREDIT FLOWS FROM BANKS AND CAPITAL MARKETS IN AN EVOLVING EUROPE Hester, Donald D. (July 1998)This paper surveys theoretical arguments and empirical evidence about the contributions of banks and security markets to economic growth in the European Union. Its financial structure differs from that in the United States. While GDP in the Union is slightly larger, banking assets are three times as large, stock market capitalization is 60%, and corporate bond debt is 80% of that in the U.S. These differences are attributed to the greater presence in Europe of universal banking, pyramidal holding companies, and government ownership of banking institutions and other firms. As privatization proceeds, banking assets will continue to be disproportionately large relative to the U.S., because both universal banks and pyramidal holding companies in the context of Roman law institutions reduce the attractiveness of equities. Equities are both a claim on a future stream of net income and a mechanism which can be used to control and restructure through takeovers. The latter is largely missing in Europe and not likely to develop without massive changes in industrial organization and legal institutions. While market capitalization has been trending up sharply in the two areas, both capitalization and trading volumes in Europe are rising less rapidly than in the United States. Another reason for these trends is that with passage of time, the size distribution of firms is becoming increasingly skewed towards small firms in Europe relative to the United States. Banks have a comparative advantage in serving small firms.
463
Durlauf, Steven N.
WHAT SHOULD POLICY MAKERS KNOW ABOUT ECONOMIC COMPLEXITY?
The Washington Quarterly,Vol. 21:1, pp. 157-165, Winter 1998
464
LeBaron, Blake
TECHNICAL TRADING RULES AND REGIME SHIFTS IN FOREIGN EXCHANGE
Advanced Trading Rules, eds. E. Acar and S. Satchell, Butterworth-Heinemann, pp. 5-40, 1998.