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Abstract: We prove the existence of stationary equilibrium in the primary and secondhand markets for an indivisible consumer durable in a general model with stochastic degradation and endogenous scrappage decisions. Unlike Rust (1985), we introduce transaction costs in the model as a motivation for consumer holdings of durables across multiple quality levels. In addition, we allow for multiple types of durables (e.g., Porsche and BMW). Since we use a fixed point theorem in making the existence argument, we do not need to invoke the single-crossing property on consumer tastes.
Abstract: We analyze the core of a class of coalition formation game in which every player's payoff depends only on the members of her coalition. We first consider anonymous games and additively separable games. Neither of these strong properties guarantee the existence of a core allocation, even if additional strong properties are imposed. We then introduce two top-coalition properties each of which guarantee the existence. We show that these properties are independent of the Scarf-balancedness condition. Finally we give several economic applications.
Abstract: Many cities are located on rivers or coasts. This paper argues that such cities developed as transportation hubs or markets for interregional trade, since these locations provide better access (lower marginal transportation costs) to other regions. Local products are collected at such hubs, and interregional trade then takes place among these transportation hubs. As the volume of trade between hubs increases, more workers are needed in order to meet labor demand for shipping and handling commodities, resulting in population agglomeration at such hubs. This paper constructs a simple three location-identical consumer model, in which transportation hub and population agglomeration emerge endogenously. In contrast with much of the literature on city formation, we introduce no economies of scale into the model. Markets are assumed to be perfectly competitive and complete. Since prices are determined in equilibrium, transportation costs and routes are simultaneously determined in the system. Population agglomeration occurs solely because of location-specific production technologies (which generates gains from trade) and the differences in transportation technologies among locations (which determines the transportation routes). It is shown that a hub city emerges when transportation technologies are heterogeneous enough.
Abstract: Geographical concentration of stores that sell similar commodities is pervasive. To analyze this phenomenon, this paper provides a simple two dimensional spatial competition model with consumer taste uncertainty. Given taste uncertainty, concentration of stores attracts more consumers since more variety means that a consumer has a higher chance of finding her favorite commodity (a market size effect). On the other hand, concentration of stores leads to fiercer price competition (a price cutting effect). The trade-off between these two effects is the focus of this paper. We provide a few sufficient conditions for the nonemptiness of equilibrium store location choices in pure strategies. We illustrate, by an example, that the market size effect is much stronger for small scale concentrations, but as the number of stores at the same location becomes larger, the price cutting effect eventually dominates. We also discuss consumers' incentives to visit a concentration of stores instead of using mail orders.
Abstract: This paper summarizes theoretical findings on the determinants of liquid assets held by banks. The findings are summarized in a series of predictions, some of which are tested using a panel data set on Mexican banks. Surprisingly, we find that banks with relatively more demand deposits have relatively less liquid assets, in contrast with the theoretical prediction. We further exploit a period characterized by a prolonged aggregate liquidity shock on the Mexican banking system to shed light on the question: are there banks that rely more than others on liquid assets to meet their liquidity needs? We find that only small banks seem to rely on liquid assets to meet severe liquidity shocks.
Abstract: This paper studies the error in forecasting a dynamic time series with a deterministic component. We show that when the data are strongly serially correlated, forecasts based on a model which detrends the data before estimating the dynamic parameters are much less precise than those based on an autoregression that includes the deterministic components. The local asymptotic distribution of the forecast errors under the two-step procedure exhibits bimodality, and the forecasts are conditionally median biased in a direction that depends on the order of the deterministic trend function. We explore the conditions under which feasible GLS detrending can lead to forecast error reduction. The finite sample properties of OLS and feasible GLS forecasts are compared with forecasts based on unit root pretesting. The procedures are applied to fifteen macroeconomic time series to obtain real time forecasts. Forecasts based on feasible GLS detrending tend to be more efficient than forecasts based on OLS detrending. Regardless of the detrending method, unit root pretests often improve forecasts.
Abstract: A statistical problem that arises in several fields is that of estimating the features of an unknown distribution, which may be conditioned on covariates, using a sample of binomial observations on whether draws from this distribution exceed threshold levels set by experimental design. One application is destructive diration analysis, where the process is censored at an observation test time. Another is referendum contingent valuation in resource economics, where one is interested in features of the distribution of values placed by consumers on a public good such as an endangered species. Sampled consumers are asked whether they would vote for a referendum that would provide the good at a cost specified by experimental design. This paper provides practical estimators for moments and quantiles of the unknown distribution in this problem. Under mild regularity conditions and a randomized design for thresholds, we show that the moments estimators are root-N consistent and asymptotically normal, despite the limited information in binomial response, while quantile estimators converge at a lower rate equal to the optimal rate for nonparametric regression estimation of the distribution of responses.
Abstract: Relative prices are nonstationary and standard root-T inference is invalid for demand systems. But demand systems are nonlinear functions of relative prices, and standard methods for dealing with nonstationarity in linear models cannot be used. Demand system residuals are also frequently found to be highly persistent, further complicating estimation and inference. We propose a variant of the Translog demand system, the NTLOG, and an associated estimator that can be applied in the presence of nonstationary prices with possibly nonstationary errors. The errors in the NTLOG can be interpreted as random utility parameters. The estimates have classical root-T limiting distributions. We also propose an explanation for the observed nonstationarity of aggregate demand errors, based on aggregation of consumers with heterogeneous preferences in a slowly changing population. Estimates using US data are provided.
Abstract: In this paper we develop some econometric theory for factor models of large dimensions. The focus is the determination of the number of factors, which is an unresolved issue in the rapidly growing literature on multifactor models. We propose some panel C(p) criteria and show that the number of factors can be consistently estimated using the criteria. The theory is developed under the framework of large cross-sections (N) and large time dimensions (T). No restriction is imposed on the relation between N and T. Simulations show that the proposed criteria yield almost precise estimates of the number of factors for configurations of the panel data encountered in practice.
Abstract: The nonparametric censored regression model, with a fixed, known censoring point (normalized to zero), is y = max[0,m(x)+e], where both the regression function m(x) and the distribution of the error e are unknown. This paper provides consistent estimators of m(x) and its derivatives. The convergence rate is the same as for an uncensored nonparametric regression and its derivatives. We also provide root n estimates of weighted average derivatives of m(x), which equal the coefficients in linear or partly linear specifications for m(x). An extension permits estimation in the presence of a general form of heteroskedasticity. We also extend the estimator to the nonparametric truncated regression model, in which only uncensored data points are observed.
Abstract:: We lay out a tractable small open economy version of the canonical sticky price model, and use it as a framework to study the properties of three alternative monetary regimes: (a) optimal monetary policy, (b) a Taylor rule, and (c) an exchange rate peg. Several interesting results emerge from our analysis. First, the optimal policy is shown to entail a positive correlation between domestic and world interest rates. That doesnÕt prevent sizable fluctuations of nominal and real exchange rates from occurring, though the implied volatility of those variables is much smaller than the empirical one. Second, a Taylor rule generally leads to excess volatility of nominal variables, and excess smoothness of real variables, relative to the optimal policy. Finally, we show that a pure exchange rate peg causes the equilibrium to be indeterminate and may thus be a source of macroeconomic instability.
Abstract: Industrial countries moving from fixed to floating exchange rate regimes experience dramatic rises in the variability of the real exchange rate. This evidence, forcefully documented by Mussa (1986), is a puzzle to the extent that it is hard to reconcile with the assumption of flexible prices. This paper shows that a model that combines nominal rigidities with a systematic behavior of monetary policy approximating a managed-fixed exchange rate regime is consistent with Mussa's findings: the real exchange rate is between three and six times more variable under floating than under fixed rates, and this holds independently of the underlying shocks. The impact of the change in regime on the volatility of other real macroeconomic variables, however, depends crucially on the specification of the monetary policy rule and on the source of fluctuations. The model takes also a theoretical stand on other issues raised in the empirical literature, like the so-called exchange rate anomaly, and the international monetary policy shock transmission sign.
Abstract: The trend toward earlier and earlier retirement was one of the most important labor market developments of the twentieth century. It was evident in all the major industrialized countries. In the United States, however, the trend toward earlier retirement came to at least a temporary halt in the mid-1980s. Male participation rates at older ages have stabilized or even increased slightly. Older womenÕs participation rates are clearly rising. This paper examines the environmental and policy changes contributing to the long-term decline in the U.S. retirement age as well as developments that contributed to the recent reversal. The dominant source of earlier retirement was the long-term increase in AmericansÕ wealth, which permitted workers to enjoy rising living standards even as they spent a growing percentage of their lives outside the paid work force. The expansion of Social Security pensions and of employer-sponsored pension plans and the introduction of mandatory retirement rules also encouraged earlier retirement over much of the last century. Many public policies and private institutions that encouraged early retirement have been modified in recent years. Mandatory retirement has been outlawed in most jobs. Social Security is no longer growing more generous, and worker coverage under company pension plans is no longer rising. Both Social Security and many private pensions have become more "age neutral" with respect to retirement. Public and private pension programs now provide weaker financial incentives for workers to retire at particular ages, such as age 62 or age 65, and offer stronger incentives for aging workers to remain in the labor force. The paper outlines additional policies that could encourage later retirement. An open question is whether such policies are needed. Rising labor productivity and increased work effort during the pre-retirement years mean that Americans can continue to enjoy higher living standards, even as improved longevity adds to the number of years that workers spend in retirement. If opinion polls are to be believed, most workers favor preserving the institutions that allow early retirement even if it means these institutions will require heavier contributions from active workers.
Abstract: This paper assesses the apparent decline during the 1990s in the unemployment rate associated with stable inflation--the so-called "NAIRU." The paper argues that supply shocks alone are not sufficient to account for this decline and that changes in labor markets are in part responsible. I consider several popular labor-market explanations for the decline. Although a demographic shift toward a more experienced workforce, a growing use of temporary employees, and a skyrocketing prison population probably have contributed to the decline in the NAIRU, they do not adequately explain the timing of an acceleration in that decline during the mid-1990s. I propose an alternative explanation based on evidence showing an increase during the 1990s in the synchronization of regional economic conditions. In particular, I suggest that greater uniformity in economic conditions across regions during the current business expansion has limited spillovers of wage and price pressures from one region of the country to another, thereby lowering the national NAIRU.
Abstract:: We test whether uncertainty in the CEO's compensation influences the firm's investment decisions, using panel compensation data and cross-sectional invetsment data. Given the prospect of bearing extra risk, a rational agent reacts to minimize the impact of such risk. We provide evidence that CEOs with high earnings uncertainty invest less. As expected, the negative impact of permanent earnings uncertainty on firm investment is larger than that of transitory earnings uncertainty. The results are robust to several alternative specifications and lend support to Stulz' over-investment hypothesis. Knowing how investment is tied to the CEO's earnings uncertainty helps in building the correct compensation package.
Abstract: Since the mid-1980s many authors have investigated the influence of information technology (IT) on productivity. Until recently there has been no clear evidence that productivity increases as a result of IT spending. This productivity paradox is partly due to the difficulty in correctly identifying outputs, particularly in the service sector such as the trucking industry. Products are often differentiated by quality attributes of the service provided, rather than merely the physical content of the good delivered by motor carriers. A carrier's primary marketing objective, e.g. on-time-performance vs. lowest rate carrier, are precisely what differentiates a trucking firm's service. This paper uses cross-sectional data to show that the use of increasingly sophisticated IT by trucking firms varies depending upon marketing objectives. Our empirical results imply that in order to measure the impact of IT on productivity it is crucial to account for how the firm differentiates its product. We conclude that the productivity paradox can be alleviated if measures of output incorporate firms' marketing objectives.
Abstract: Economic theory predicts that earnings uncertainty increases precautionary saving and causes households to include relatively liquid assets in their portfolios. Risk avoidance and the demand for liquidity cause these portfolio choices. Studies investigating United States evidence of precautionary portfolio allocation are nonexistent. With panel data, our results confirm the precautionary motive, and indicate that the desire to moderate total exposure to risk (temperance) and the demand for liquidity each affect the household's portfolio. Both permanent and transitory earnings uncertainty boost total wealth, and this precautionary wealth tends to be invested in safe, liquid assets. These results are particularly pronounced for people facing borrowing constraints. Such behavior is consistent with consumer utility functions that exhibit decreasing absolute risk aversion and decreasing strength of the precautionary motive (prudence). Our findings are important because both unemployment compensation and income taxes provide insurance that reduce earnings uncertainty. As a result, precautionary saving is both curtailed and reallocated. These policies could have large effects on capital formation and interest rates, through changes in the composition of household asset demand.
Abstract: This paper asks two questions about child poverty dynamics. The first is whether long-run transitions out of poverty have changed. The second is whether the events associated with exits from poverty have changed. We use the Panel Study of Income Dynamics to contrast the patterns of children 0 to 5 over the 1970's to patterns for similar children over the 1980's. We find that roughly half of the children who were in poor families at the start of each decade remained poor. For black children and children in female headed households, both the relative and absolute mobility are considerably lower. These mobility rates show no significant changes over time. Likewise, the events associated with exits out of poverty are remarkably stable.
Abstract: This paper explores the claim that college educated workers are increasingly likely to be in "non-college" occupations. We provide a conceptual framework which gives analytical content to the previously vague distinction between college and non-college jobs. This framework is used to show that skill bias technological change will to lead to a decline in the proportion of college workers in non-college jobs. This prediction is supported by the data.
Abstract: There isn't nearly as much trade as standard models suggest there should be. Formal trade barriers and transport costs are too low to account for the difference. The pattern of missing trade has interesting variation across country pairs. These clues suggest the need for theoretical and eventually structural empirical work on the missing transactions costs. This paper reviews recent empirical findings and some promising research directions in search, predation and contract theory.
Abstract: This paper explores the wage and job dynamics of less-skilled workers by estimating a structural model in which agents choose among jobs that differ in initial wage and wage growth. The model also formalizes the intuitive notion that some of these jobs offer "stepping stones" to better jobs. The estimated model assumes that job offers consist of three attributes: an initial wage, an expected wage growth, and an indicator of the distribution from which future offers will come. We derive the conditions under which agents accept these offers and the effect of involuntary terminations on the acceptance decision. This model shows that the probability of leaving an employer depends both on the slope and intercept of the current and offered jobs and the probability of gaining access to the dominant wage offer distribution. We use the SIPP to estimate this model, which allows us to recover parameters of the wage offer distributions and the probability that a job is a stepping stone job. Our empirical work indicates that wage offer distributions vary systematically with the slope and intercept of wages in the current job and that there is a non-zero probability of being offered a stepping stone job.
Abstract: This paper focuses on the specification and stability of a dynamic, stochastic, general equilibrium model of the business cycle with sticky prices. Maximum likelihood estimates reveal that the data prefer a version of the model in which adjustment costs apply to the price level but not to the inflation rate. Formal hypothesis tests provide evidence of instability in the estimated parameters, concentrated in the Euler equation linking consumption growth to the interest rate.