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
9517R HARD BARGAINS AND LOST OPPORTUNITIES Binmore, Ken, Chris Proulx, Larry Samuelson and Joe Swierbinski (revised November 14, 1997)A long tradition in economics, stretching from Edgeworth through Coase to recent theories of contracting and renegotiation, assumes that any potential gains from trade will be exploited. This emphasis on efficiency clashes with the possibility that hard bargaining over the division of the surplus may cause some potential deals to be lost. This paper examines an Outside Option Game designed to study the tension between maximizing the size of the surplus and bargaining over the division of this surplus among those who contributed to its creation. An experimental study confirms that subjects often fail to achieve efficient outcomes. A theoretical model is proposed that accounts for this behavior in terms of an equilibrium achieved in an imperfect world.
Journal of Economic Literature Classification Numbers C70, C72.
Keywords: Bargaining, Coase Theorem, Evolutionary Games
9529R EVOLUTIONARY DRIFT AND EQUILIBRIUM SELECTION Binmore, Ken and Larry Samuelson (revised December 5, 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.
Journal of Economic Literature Classification Numbers C70, C72
Keywords: Evolutionary Games, Cheap Talk, Stability, Drift
9603R EVOLUTIONARY STABILITY IN ALTERNATING-OFFERS BARGAINING GAMES Binmore, Ken, Chris Proulx, Larry Samuelson and Joe Swierbinski (revised November 17, 1997)This paper characterizes modified evolutionarily stable strategies (MESSes) in Rubinstein's alternating- offers, infinite-horizon bargaining game. We show that a MESS causes agreement to be achieved immediately, with neither player willing to delay the agreement by one period in order to achieve the other player's share of the surplus. Each player's share of the surplus is then bounded between the shares received by the two players in the unique subgame-perfect equilibrium of Rubenstein's game. As the probability of a breakdown in negotiations becomes small (or discount factors become large), these bounds collapse on the subgame-perfect equilibrium.
Journal of Economic Literature Classification Numbers C70, C78
Keywords: Bargaining, Alternating offers, Subgame perfection, Evolutionary stability
9709R RATIONAL CHOICE AND THE STUDY OF SCIENCE Durlauf, Steven N. (revised October 13, 1997) (original title: Reflections on How Economic Reasoning Can Contribute to theThis paper describes a perspective on the evolution of scientific theory choice which is based on explicitly treating the behavior of the scientific community as emergent from the interactive decisions of individual scientists. The analysis is based on treating individual scientists as possessing a preference ordering over theories which embodies differences in evaluative criteria as well as nonscientific factors such as conformity effects. The analysis suggests that the relationship between nonscientific factors, evidentiary support and community consensus is highly complex, so that simple claims about the role of social factors in mitigating scientific progress are generally incorrect.Download WP#9709R in PDF.
Study of Science)
9711R THE MEMBERSHIPS THEORY OF INEQUALITY: IDEAS AND IMPLICATIONS Durlauf, Steven N. (revised August 14, 1997)This paper argues that much of the recent economic research on inequality contains a common set of underlying ideas which in term represents a general framework for analysis. This new perspective emphasizes the role of an array of group-level influences in determining individual soicoeconomic outcomes. In turn, memberships in these groups are determined endogenously in the economy/society. Taken as a whole, this new perspective therefore may be regarded as a memberships theory of inequality. Basic ideas of the memberships theory are explored and the state of supporting empirical evidence is assessed. Implications of the memberships theory for the ethics of redistribution policy are considered. Download WP#9711R in PDF.
9717 ON OPTIMAL INSTRUMENTAL VARIABLES ESTIMATION OF TIME SERIES MODELS West, Kenneth D. (August 1997)In many time series models, an infinite number of moments can be used for estimation in a large sample. I supply a technically undemanding proof of a condition for optimal instrumental variables use of such moments in a parametric model. I also illustrate application of the condition in estimation of an autoregression with a conditionally heteroskedastic disturbance.
9718 AN EVOLUTIONARY BOOTSTRAP APPROACH TO NEURAL NETWORK PRUNING AND GENERALIZATION LeBaron, Blake (August 1997)This paper combines techniques drawn from the literature on evolutionary optimization algorithms along with bootstrap based statistical tests. Bootstrapping is 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 number of potential network architectures. The combination of these two methods creates a network estimation and selection procedure which finds parsimonious network structures which generalize well. The bootstrap methodology also allows for objective functions other than usual least squares, since it can estimate the in sample bias for any function. Examples are given for forecasting chaotic time series contaminated with noise.
9719 FINANCIAL MARKET STRUCTURE AND THE ERGODICITY OF PRICES Domowitz, Ian and Mahmoud El-Gamal (September 1997)The properties of prices, especially with respect to initial conditions related to market startup and unusual shocks to the market environment, are of concern to regulators assessing alternative financial market structures. A natural way to investigate the importance of initial conditions is to evaluate the ergodicity of the price process. A consistent nonparametric test for ergodic failure is introduced for this purpose. We compare the ergodic properties of prices across (i) a computerized market, characterized by an electronic limit order book and a separate batch opening protocol; and (ii) a traditional open-outcry floor market. The work is enabled in part by unusual matched high-frequency trading data on identical financial instruments traded in both markets over the same 24-hour period. We find that differences in market structure matter, in the sense that prices in the automated market exhibit ergodic failure, while prices generated by floor trading are ergodic. Variations in information environments over the course of the day also are considered, but cannot account for the results.
Key words: auctions, financial market structure, ergodicity, consistent nonparametric test procedures, high
frequency data
Download WP#9719 in PDF.
9720 SEMIPARAMETRIC EFFICIENCY BOUNDS UNDER SHAPE RESTRICTIONS Tripathi, Gautam (September 22, 1997)Key words: Efficiency Bounds, Semiparametric Models, Shape Restrictions. Download WP#9720 in PDF.
9721 WHAT SHOULD POLICYMAKERS KNOW ABOUT ECONOMIC COMPLEXITY? Durlauf, Steven N. (September 13, 1997)No abstract. Download WP#9721 in PDF.
9722 CONSUMPTION OVER THE LIFE CYCLE Gourinchas, Pierre-Olivier and Jonathan A. Parker (November 1997)This paper employs a synthetic cohort technique and Consumer Expenditure Survey data to construct average age-profiles of consumption and income over the working lives of typical households across different education and occupation groups. Even after controlling for family and cohort effects, typical consumption profiles are not flat, and seem to track income at young ages. Using these profiles, we estimate a structural model of optimal life-cycle consumption expenditures in the presence of realistic income uncertainty. The model fits the profiles quite well. In addition to providing tight estimates of the discount rate and risk aversion, we find that consumer behavior changes strikingly over the life-cycle. Young consumers behave as "buffer-stock" agents. Around age 43, the typical household starts accumulating liquid assets for retirement and its behavior mimics more closely that of a certainty equivalent consumer. This change in behavior is mostly driven by the life-cycle profile of expected income. Our methodology provides a natural decomposition of saving into its precautionary and retirement components. Download 9722 in PDF.
9723 THE TIMING OF PURCHASES, MARKET POWER, AND ECONOMIC FLUCTUATIONS Parker, Jonathan A. (November 1997)This paper analyzes a market in which sellers have market power and set price taking into account the ability of buyers to time their purchases. I demonstrate that expected fluctuations in demand are inherently fluctuations in the elasticity of demand, leading to smaller markups on the up-side of booms. Buyer intertemporal optimization opposes this force, generating real price stickiness and smoothing prices over time. These mechanisms produce prices which are less variable than quantities, countercyclical markups, and greater persistence of demand shocks. Using industry data, I demonstrate that consumer goods for which timing is likely to be important do exhibit less real price response to demand-driven movements in sales. Download 9723 in PDF.
9724 THE REACTION OF HOUSEHOLD CONSUMPTION TO PREDICTABLE CHANGES IN PAYROLL TAX RATES Parker, Jonathan A. (November 1997)This paper exploits a natural experiment provided by the pattern of payroll taxation in the U.S. to test whether household consumption responds to predictable changes in after-tax income. Social Security taxes are withheld from individual paychecks until an annual contribution limit is reached, at which point take-home pay rises for the remainder of the calendar year. Using a set of statutory rate increases as well as this source of variation, the elasticity of nondurable consumption with respect to after-tax income is to be found to be 0.5 over three-month intervals. I find little evidence for or against the hypothesis that households with fewer liquid assets respond more to these income changes. However, consistent with some models of bounded rationality, the violations of consumption smoothing are most pronounced for semi-durable goods. Download 9724 in PDF.
9725 TIME SERIES PROPERTIES OF AN ARTIFICIAL STOCK MARKET Arthur, W. Brian, Blake LeBaron, and Richard Palmer (November 1997)This paper presents results from an experimental computer simulated stock market. In this market artificial intelligence algorithms take on the role of traders. They make predictions about the future, and buy and sell stock as indicated by their expectations of future risk and return. Prices are set endogenously to clear the market. Time series from this market are analyzed from the standpoint of some well known empirical features in real markets. The simulated market is able to replicate several of these phenomenon, including fundamental and technical predictability, volatility persistence, and leptokurtosis. Moreover, agent behavior is shown to be consistent with these features in that they condition on the variables that are found to be significant in the time series tests. Inside this experimental model there exists a well-defined linear homogenous rational expectations equilibrium. This is used as a benchmark in the experiments to assess the overall ability of the agents in learning. It is found that for certain parameters the results in the market are consistent with this benchmark.
9726 FAIRNESS, SELFISHNESS AND SELFISH FAIRNESS: EXPERIMENTS ON GAMES WITH UNEQUAL EQUILIBRIUM PAYOFFS Andreoni, James, Paul M. Brown and Lise Vesterlund (November 1997)In games with unequal equilibrium payoffs, concepts of fairness and selfishness often clash. We structure the approach to fairness versus selfishness as a struggle between two forces that act on an individual's behavior. The two forces may be pushing behavior in the same direction in some cases but in opposite directions in others. Our goal is to collect the kind of information that may ultimately help formulate a full-blown model of how fairness and selfishness interact, both within an individual and across individuals in a given situation. We do this by examining three games of privately provided public goods. All of the games have virtually identical equilibria, but differ in the degree to which fairness can affect the outcome. We show that sometimes selfishness can overpower fairness, but at other times fairness can be so strong that even selfish players find it optimal to play fair. Download 9726.
454
Arthur, W.B., Steven N. Durlauf and D. Lane
INTRODUCTION TO THE ECONOMY AS AN EVOLVING COMPLEX SYSTEM II
The Economy as an Evolving Complex System II, Eds. Arthur, Durlauf and Lane, SFI Studies in the Science of
Complexity, Vol. XXVII, Addison-Wesley, pp. 1-14, 1997.
455
Durlauf, Steven N.
STATISTICAL MECHANICS APPROACHES TO SOCIOECONOMIC BEHAVIOR
The Economy as an Evolving Complex System II, Eds. Arthur, Durlauf and Lane, SFI Studies in the Science of
Complexity, Vol. XXVII, Addison-Wesley, pp. 81-104, 1997.
456
Brock, William A.
ASSET PRICE BEHAVIOR IN COMPLEX ENVIRONMENTS
The Economy as an Evolving Complex System II, Eds. Arthur, Durlauf and Lane, SFI Studies in the Science of
Complexity, Vol. XXVII, Addison-Wesley, pp. 385-423, 1997.
457
Brock, William A. and Cars H. Hommes
A RATIONAL ROUTE TO RANDOMNESS
Econometrica, Vol. 65, No. 5, pp. 1059-1095, September, 1997.
458
LeBaron, Blake
A FAST ALGORITHM FOR THE BDS STATISTIC
Studies in Nonlinear Dynamics and Econometrics, Quarterly Journal, Volume 2, Number 2, The MIT Press, pp. 53-59, July 1997.
459
Arthur, W. Brian, John H. Holland, Blake LeBaron, Richard Palmer and Paul Tayler
ASSET PRICING UNDER ENDOGENOUS EXPECTATIONS IN AN ARTIFICIAL STOCK MARKET
The Economy as an Evolving Complex System II, Eds. Arthur, Durlauf and Lane, SFI Studies in the Science of
Complexity, Vol. XXVII, Addison-Wesley, pp. 15-44, 1997.
460
Bollinger, Christopher R. and Martin H. David
MODELING DISCRETE CHOICE WITH RESPONSE ERROR: FOOD STAMP PARTICIPATION
Journal of the American Statistical Associaton, Vol. 92, No. 439, pp. 827-835, September 1997.
461
Levinson,Arik
ENVIRONMENTAL REGULATIONS AND MANUFACTURERS' LOCATION CHOICES: EVIDENCE FROM THE CENSUS OF MANUFACTURES
Journal of Public Economics, Vol. 62, pp. 5-29, 1996.
462
Christian, Charles, Rebecca London, Jonathan A. Parker and Joel Slemrod
APRIL 15 SYNDROME
Economic Inquiry, Vol. XXXV, pp. 695-709, October 1997