IEPR Working Papers

2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011

IEPR 05.41

Market Efficiency Today

M. Hashem Pesaran

IEPR 05.40

A Model of the Trends in Hours

Guillaume Vandenbroucke

Abstract:During the first half of the 20th century the workweek in the United States declined, and its distribution across wage deciles narrowed. The hypothesis proposed is twofold. First, technological progress, through the rise of wages and the decreasing cost of recreation, made it possible for the average US worker to afford more time off from work. Second, changes in the wage distribution explain the shift in the hours distribution. A general equilibrium model is built to explore whether such mechanisms can, quantitatively, account for the observations. The model is calibrated to match moments of the US economy in 1900. It predicts the trends in hours closely, from 1900 to 1950. Counterfactual experiments show that the rise in wages is the main contributor to the decline in hours. The decline in the price of leisure goods explain 6% of the total decline in hours.

JEL Classifications:E24, J22, O11, O33

Keywords:Hours worked, leisure, home production, technological progress

IEPR 05.39

Estimation of Nonlinear Models with Mismeasured Regressors Using Marginal Information

Yingyao Hu and Geert Ridder

Abstract:We consider the estimation of nonlinear models with mismeasured explanatory variables, when information on the marginal distribution of the true values of these variables is available. We derive a semi-parametric MLE that is is shown to be pn consistent and asymptotically normally distributed. In a simulation experiment we find that the finite sample distribution of the estimator is close to the asymptotic approximation. The semi-parametric MLE is applied to a duration model for AFDC welfare spells with misreported welfare benefits. The marginal distribution of the correctly measured welfare benefits is obtained from an administrative source.

JEL Classifications:C14, C41, I38

Keywords:measurement error model, marginal information, deconvolution, Fourier transform, duration model, welfare spells.

IEPR 05.38

Incidental Trends and the Power of Panel Unit Root Tests

Hyungsik Roger Moon, Benoit Perron, Peter C.B. Phillips

Abstract:The asymptotic local power of various panel unit root tests are investigated. The (Gaussian) power envelope is obtained under homogeneous and heterogeneous alternatives. The envelope is compared with the asymptotic power functions for the pooled t- test, the Ploberger-Phillips (2002) test, and a point optimal test in neighborhoods of unity that are of order and ; depending on whether or not incidental trends are extracted from the panel data. In the latter case, when the alternative hypothesis is homogeneous across individuals, it is shown that the point optimal test and the Ploberger-Phillips test both achieve the power envelope and are uniformly most powerful, in contrast to point optimal unit root tests for time series. Some simulations examining the finite sample performance of the tests are reported.

JEL Classifications:C22 , C23

Keywords:Asymptotic power envelope, common point optimal test, heterogeneous alternatives, incidental trends, local to unity, power function, panel unit root test

IEPR 05.37

A Study of a Semiparametric Binary Choice Model With Integrated Covariates

Emmanuel Guerre and Hyungsik Roger Moon

Abstract:This paper studies a semiparametric nonstationary binary choice model. Imposing a spherical nor- malization constraint on the parameter for identification purpose, we find that the MSE and SMSE are at least pn-consistent. Comparing this rate to the parametric MLE's convergence rate, we show that when a normalization restriction is imposed on the parameter, the Park and Phillips (2000)'s parametric MLE converges at a rate of n3/4 and its limiting distribution is a mixed normal. Finally, we show briefly how to apply our estimation method to a nonstationary single index model.

IEPR 05.36

Reducing Bias of MLE in a Dynamic Panel Model

Jinyong Hahn and Hyungsik Roger Moon

Abstract:This paper investigates a simple dynamic linear panel regression model with both ?xed e¤ects and time e¤ects. Using "large n and large T" asymptotics, we approximate the distribution of the fixed effect estimator of the autoregressive parameter in the dynamic linear panel model and derive its asymptotic bias. We find that the same higher order bias correction approach proposed by Hahn and Kuersteiner (2002) can be applied to the dynamic linear panel model even when time specific e¤ects are present.

IEPR 05.35

An Empirical Analysis of Nonstationarity in Panels of Exchange Rates and Interest Rates with Factors

Hyungsik Roger Moon and Benoit Perron

Abstract:This paper studies nonstationarities in panels of exchange rates and interest rates. For this, we survey developments in the analysis of nonstationary panels with cross-sectional dependence modeled as a factor model. We focus on panel unit root tests and on inference on the nonstationary factors. Our results suggest that PPP does not hold for our panel of 17 exchange rates due to the presence of nonstationary factors. The dominant factor has a very strong European flavor. Moreover, we find a single nonstationary factor in a panel of Canadian and U.S. interest rates of different maturities and risk. Since some of the idiosyncratic components are stationary, these series are cointegrated. The dominant factor has a level interpretation as in the term structure literature.

IEPR 05.34

Mean-square-error Calculations for Average Treatment Effects

Guido W. Imbens, Whitney Newey, and Geert Ridder

Abstract:This paper develops a new efficient estimator for the average treatment effect, if selection for treatment is on observables. The new estimator is linear in the first-stage nonparametric estimator. This simplifies the derivation of the means squared error (MSE) of the estimator as a function of the number of basis functions that is used in the first stage nonparametric regression. We propose an estimator for the MSE and show that in large samples minimization of this estimator is equivalent to minimization of the population MSE.

JEL Classifications:C14, C20

Keywords:Nonparametric Estimation, Imputation, Mean Squared Error, Order Selection

IEPR 05.33

Why Panel Data?

Cheng Hsiao

Abstract:We explain the proliferation of panel data studies in terms of (i) data availability, (ii) the more heightened capacity for modeling the complexity of human behavior than a single cross-section or time series data can possibly allow, and (iii) challenging methodology. Advantages and issues of panel data modeling are also discussed.

Keywords:Panel data; Longitudinal data; Unobserved heterogeneity; Random effects; Fixed effects

IEPR 05.32

Unit Roots and Cointegration in Panels

Jörg Breitung and M. Hashem Pesaran

Abstract:This paper provides a review of the literature on unit roots and cointegration in panels where the time dimension (T), and the cross section dimension (N) are relatively large. It distinguishes between the first generation tests developed on the assumption of the cross section independence, and the second generation tests that allow, in a variety of forms and degrees, the dependence that might prevail across the di¤erent units in the panel. In the analysis of cointegration the hypothesis testing and estimation problems are further complicated by the possibility of cross section cointegration which could arise if the unit roots in the different cross section units are due to common random walk components.

JEL Classifications:C12, C15, C22, C23

Keywords:Panel Unit Roots, Panel Cointegration, Cross Section Dependence,Common Effects

IEPR 05.31

Survey Expectations

Hyeok Jeong and Yong Kim

Abstract:The process of modernization is neither instantaneous nor homogeneous across countries. Given the large productivity growth gap between traditional and modern sectors, the gradual and varying degree of transition between these technologies seems puzzling. We develop a theory of transition that resolves this puzzle. The key forces are sector-specific complementarity between work-experience and labor, and exogenous technical progress present only in the modern sector. Using nationally representative micro data from the Socio-Economic Survey of Thailand (1976-1996), we measure the theory by estimating cross-sectional earnings functions, and assess if the model captures the observed dynamics of transition. The model jointly explains the gradual and S-shaped transition, stagnant growth of aggregate earnings, and the rise and fall of experience-earnings profiles in Thailand.

JEL Classifications:O11, O47, J31, O15

Keywords:Modern Transition, Sector-Specific Complementarity, TFP and Inequality

IEPR 05.30

Survey Expectations

M. Hashem Pesaran and Martin Weale

Abstract:This paper focusses on survey expectations and discusses their uses for testing and modeling of expectations. Alternative models of expectations formation are reviewed and the importance of allowing for heterogeneity of expectations is emphasized. A weak form of the rational expectations hypothesis which focusses on average expectations rather than individual expectations is advanced. Other models of expectations formation, such as the adaptive expectations hypothesis, are briefly discussed. Testable implications of rational and extrapolative models of expectations are reviewed and the importance of the loss function for the interpretation of the test results is discussed. The paper then provides an account of the various surveys of expectations, reviews alternative methods of quantifying the qualitative surveys, and discusses the use of aggregate and individual survey responses in the analysis of expectations and for forecasting.

JEL Classifications:C40, C50, C53, C80

Keywords:Models of Expectations Formation, Survey Data, Heterogeneity, Tests of Rational Expectations

IEPR 05.29

On Deconvolution as a First Stage Nonparametric Estimator

Yingyao Hu and Geert Ridder

Abstract:We reconsider Taupin's (2001) Integrated Nonlinear Regression (INLR) estimator for a nonlinear regression with a mismeasured covariate. We find that if we restrict the distribution of the measurement error to the class of range-restricted distributions, then weak smoothness assumptions suffice to ensure pn consistency of the estimator. The restriction to such distributions is innocuous, because it does not affect the fit to the data. Our results show that deconvolution can be used in a nonparametric first step without imposing restrictive smoothness assumptions on the parametric model.

IEPR 05.28

Sources of TFP Growth: Occupational Choice and Financial Deepening

Hyeok Jeong and Robert M. Townsend

Abstract: We develop a method of growth accounting based on the integrated use of transitional growth models and micro data. We decompose total factor productivity (TFP) growth into the occupational-shift effect, financial-deepening e¤ect, capital-heterogeneity effect, and sectoral-Solow-residuals. Applying this method to Thailand, which experienced rapid growth with enormous structural changes between 1976 and 1996, we find that 73 percent of TFP growth is explained by occupational shifts and financial deepening, without presuming exogenous technical progress. Expansion of credit is a major part. We also show the role of endogenous interaction between factor price dynamics and the wealth distribution for TFP.

JEL Classifications:O47, O16, J24, D24

Keywords:Total Factor Productivity, Occupation Choice, Financial Deepening

IEPR 05.27

The Emerging Market Crisis and Stock Market Linkages: Further Evidence

Jian Yang, Cheng Hsiao, Qi Li, and Zijun Wang

Abstract: This study examines the long-run price relationship and the dynamic price transmission among the U.S., Germany, and four major Eastern European emerging stock markets, with particular attention to the impact of the 1998 Russian financial crisis. The results show that both the long-run price relationship and the dynamic price transmission were strengthened among these markets after the crisis. The influence of Germany became noticeable on all the Eastern European markets only after the crisis but not before the crisis. We also conduct a rolling generalized VAR analysis to confirm the robustness of the main findings.

JEL Classifications:G15, C32

Keywords:market linkages, emerging stock markets, generalized impulse response analysis, generalized forecast error variance decomposition, rolling VAR analysis.

IEPR 05.26

Ranking Sealed High-Bid and Open Asymmetric Auctions

Harrison Cheng

Abstract: For an important family of asymmetric auctions, we show that the seller's expected revenue is higher in the sealed high-bid auction than in the open auction. This is true for any arbitrary numbers of weak and strong buyers. The family has linear equilibrium bidding strategies, and provides a fertile ground for research in asymmetric auctions. We establish many interesting properties of the linear asymmetric auction model. Revenue comparisons for the two auction formats are performed using data observed in U.S. forest timber auctions. By taking realistic parameters fitting the data, and compare the theoretical predictions of the revenues from the two auction formats, we show that the revenue difference is minimal with a fixed number of participants. When the difference in participation is taken into account, the revenue difference predicted by the linear model is quite similar to the empirical results of Athey, Levin and Seira (2004).

IEPR 05.25

The Role of Industry, Geography and Firm Heterogeneity in Credit Risk Diversification

M. Hashem Pesaran, Til Schuermann, Björn-Jakob Treutler

Abstract: In theory the potential for credit risk diversification for banks could be substantial. Portfolios are large enough that idiosyncratic risk is diversified away leaving exposure to systematic risk. The potential for portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors. We propose a model for exploring these dimensions of credit risk diversification: across industry sectors and across di¤erent coun- tries or regions. We find that full firm-level parameter heterogeneity matters a great deal for capturing di¤erences in simulated credit loss distributions. Imposing homogeneity results in overly skewed and fat-tailed loss distributions. These differences become more pronounced in the presence of systematic risk factor shocks: increased parameter heterogeneity greatly reduces shock sensitivity. Allowing for regional parameter heterogeneity seems to better approximate the loss distributions generated by the fully heterogeneous model than allowing just for industry heterogeneity. The regional model also exhibits less shock sensitivity.

JEL Classifications:C32, E17, G20

Keywords:Risk management, default dependence, economic interlinkages, portfolio choice

IEPR 05.24

What if the UK had Joined the Euro in 1999? An Empirical Evaluation using a Global VAR

M. Hashem Pesaran, L. Vanessa Smith, Ron P. Smith

Abstract: This paper attempts to provide a conceptual framework for the analysis of counterfactual scenarios using macroeconometric models. As an application we consider UK entry to the euro. Entry involves a long-term commitment to restrict UK nominal exchange rates and interest rates to be the same as those of the euro area. We derive conditional probability distributions for the difference between the future realisations of variables of interest (e.g UK and euro area output and prices) subject to UK entry restrictions being fully met over a given period and the alternative realisations without the restrictions. The robustness of the results can be evaluated by also conditioning on variables deemed to be invariant to UK entry, such as oil or US equity prices. Economic interdependence means that such policy evaluation must take account of international linkages and common factors that drive fluctuations across economies. In this paper this is accomplished using the Global VAR recently developed by Dees, di Mauro, Pesaran and Smith (2005). The paper briefly describes the GVAR which has been estimated for 25 countries and the euro area over the period 1979-2003. It reports probability estimates that output will be higher and prices lower in the UK and the euro area as a result of entry. It examines the sensitivity of these results to a variety of assumptions about when and how the UK entered and the observed global shocks and compares them with the effects of Swedish entry.

JEL Classifications:C32, C35, E17, F15, F42

Keywords:Global VAR (GVAR), Counterfactual Analysis, UK and Sweden entry to euro.

IEPR 05.23

Modified Two Stage Least Squares Estimators for the Estimation of a Structural Vector Autoregressive Integrated Process

Cheng Hsiao, Siyan Wang

Abstract: We consider the estimation of a structural vector autoregressive model of nonstationary and possibly cointegrated variables without the prior knowledge of unit roots or rank of cointegration. We propose two modified two stage least squares estimators that are consistent and have limiting distributions that are either normal or mixed normal. Limited Monte Carlo studies are also conducted to evaluate their finite sample properties.

JEL Classifications:C32, C12, C13

Keywords:Structural vector autoregression; Unit root; Cointegration; Asymptotic properties; Hypothesis testing

IEPR 05.22

An Equilibrium Model of Managerial Compensation

Michael Magill and Martine Quinzii

Abstract: This paper studies a general equilibrium model with two groups of agents, investors (shareholders) and managers of firms, in which managerial effort is not observable and influences the probabilities of firms' outcomes. Shareholders of each firm offer the manager an incentive contract which maximizes the firm's market value, under the assumption that the financial markets are complete relative to the possible outcomes of the firms. The paper studies two sources of inefficiency of equilibrium. First, when investors are risk averse and effort influences probability, market-value maximization differs from maximization of expected utility. Second, because the optimal contract exploits all sources of information for inferring managerial effort, when firms' outputs are correlated the contract of a manager depends on the outcomes of other firms. This leads to an external effect of the effort of one manager on the compensation of other managers, which market-value maximization ignores. We show that under typical conditions these two effects lead to an under-provision of effort in equilibrium. These inefficiencies disappear however if each firm is replicated, and in the limit there is a continuum of firms of each type.

JEL Classifications:D23, D51, D62, D82

IEPR 05.21

Common Shocks and Relative Compensation Schemes

Michael Magill and Martine Quinzii

Abstract: This paper studies qualitative properties of an optimal contract in a multi-agent setting in which agents are subject to a common shock. We derive a necessary and sufficient condition for the optimal reward of an agent producing an output level y to be a decreasing (increasing) function of the outputs of the other agents, under the assumption that the agents' outputs are informative signals of the value of the common shock. The condition is that the likelihood ratio p(y, e, )/p(y, e0, ), where e is a higher effort level than e0, and  is the value of the common shock, be a decreasing (increasing) function of . We derive conditions on the way the common shock affects the marginal product of effort under which the likelihood ratio is decreasing for all output levels, or increasing for some output levels and decreasing for others.

IEPR 05.20

Assessment of Relationship between Growth and Inequality: Micro Evidence from Thailand

Hyeok Jeong

Abstract: This paper shows that growth and income distribution dynamics are closely linked through occupation, financial intermediation, and education. We use the micro data from Thailand for 1976-1996. The composi- tional changes across these characteristics account for half of the Thai inequality increase and forty percent of the Thai growth and poverty reduction. Financial deepening and educational expansion contributed to increasing inequality while occupational transformation contributed to poverty alleviation. The changes in income gaps across the income-status groups, that is, divergence and then convergence, give rise to inverted- U inequality dynamics. These two growth-related components of inequality dynamics, composition and income-gap dynamics, explain virtually all the change in overall inequality, except its initial rise. Thus, inequality dynamics can be viewed as integral part of wider process of growth as Kuznets speculated.

JEL Classifications:D31, O41, I32

Keywords:Kuznets Dynamics, Growth, Inequality, Poverty

IEPR 05.19

Discovering the Sources of TFP Growth: Occupational Choice and Financial Deepening

Hyeok Jeong and Robert M. Townsend

Abstract: Total factor productivity (TFP) growth is measured as a residual and its sources typically remain un- known inside the residual. This paper aims to identify the underlying sources of this residual growth, being explicit about both micro underpinnings and transitional growth. The key forces are occupational choice and limited access to credit. We develop a method of growth accounting that decomposes not only the overall growth but also TFP growth into four components: occupational shifts, financial deepening, capital heterogeneity, and sectoral Solow residuals. Thus we explicitly evaluate the quantitative importance of mi- cro impediments to trade such as credit constraint on aggregate growth dynamics, in particular the TFP dynamics. Applying this method to Thailand, which experienced rapid growth with enormous structural changes for the two decades between 1976 and 1996, we find that 73 percent of TFP growth can be explained on average by occupational shifts and financial deepening, without presuming exogenous technical progress. Expansion of credit is a major part of this explained TFP growth. The remainder TFP growth is related to the sectoral Solow residuals, which are determined by the endogenous interaction between the price dynamics of wage, interest rate, and profits and the evolution of wealth distribution. The nature of this interaction between price dynamics and wealth distribution depends on access to credit, and the di¤erences in measured TFP growth across subgroups di¤erentiated by any specific characteristics may reflect the varying degrees of limited access to credit rather than subgroup-specific technical changes. The above key forces of TFP also provide a micro foundation of the relationship between growth and inequality. The inequality among the non-intermediated a¤ects the growth of the intermediated. The growth of the intermediated trickles down to the non-intermediated and reduces inequality among them.

JEL Classifications:O47, O16, J24, D24

Keywords:Total Factor Productivity, Occupation Choice, Financial Deepening

IEPR 05.18

Scope of Credit Risk Diversification

Samuel Hanson, M. Hashem Pesaran, Til Shuermann

Abstract: This paper considers a simple model of credit risk and derives the limit distribution of losses under different assumptions regarding the structure of systematic risk and the nature of exposure or firm heterogeneity. We derive fat-tailed correlated loss distributions arising from Gaussian (i.e. non-fat-tailed) risk factors and explore the potential for (and limit of) risk diversification. Where possible the results are generalized to non-Gaussian distributions. The theoretical results indicate that if the firm parameters are heterogeneous but come from a common distribution, for sufficiently large portfolios there is no scope for further risk reduction through active portfolio management. However, if the firm parameters come from different distributions, say for different sectors or countries, then further risk reduction is possible, even asymptotically, by changing the portfolio weights. In either case, neglecting parameter heterogeneity can lead to underestimation of expected losses. But, once expected losses are controlled for, neglecting parameter heterogeneity can lead to overestimation of risk, whether measured by unexpected loss or value-at-risk. We examine the impact of sectoral and geographic diversification on credit losses empirically using returns for firms in the U.S. and Japan across seven sectors and find that ignoring this heterogeneity results in far riskier credit portfolios. Risk, is reduced significantly when parameter heterogeneity is properly taken into account.

JEL Classifications:C33, G13, G21

Keywords:Risk management, correlated defaults, credit loss distributions, heterogeneity, diversification.

IEPR 05.17

Regulation or Markets? The Case of Employment Contracts

W. Bentley MacLeod

Abstract: Regulation of the employment contract is both wide spread and diverse. The diversity of regulation is surprising because it suggests that there is little consensus regarding optimal intervention into the labor market. This paper discusses several economic reasons why it may be efficient for employers and employees to enter into long term contracts that make employee dismissal expensive. This analysis suggests that employment contracts can be expected to be complex in practice, and hence can be viewed as part of the technology of exchange. Given that knowledge of a technology requires skill and know-how, one cannot expect all employee-employer matches to discover and use the most efficient contract terms possible. It is suggested that the regulation of the employment relationship might be improved with the creation of a market for contracts, similar to the one that currently exists in the United States for construction projects.

JEL Classifications:J300, J410, K310

IEPR 05.16

Federal Reserve Bank of Minneapolis Research Department Staff Report 334

Caroline M. Betts and Timothy J. Kehoe

Abstract: This paper studies the relation between the United States' bilateral real exchange rate and the associated bilateral relative price of nontraded goods for five of its most important trade relationships. Traditional theory attributes fluctuations in real exchange rates to changes in the relative price of nontraded goods. We find that this relation depends crucially on the choice of price series used to measure relative prices and on the choice of trade partner. The relation is stronger when we measure relative prices using producer prices rather than consumer prices. The relation is stronger the more important is the trade relationship between the United States and a trade partner. Even in cases where there is a strong relation between the real exchange rate and the relative price of nontraded goods, however, a large fraction of real exchange rate fluctuations is due to deviations from the law of one price for traded goods.

IEPR 05.15

Ratifiability of Efficient Collusive Mechanisms in Second-Price Auctions with Participation Costs

Guofu Tan and Okan Yilankaya

Abstract: We investigate whether e¢ cient collusive bidding mechanisms are a¤ected by potential information leakage from bidders' decisions to participate in them within the independent private values setting. We apply the concept of ratifiability introduced by Cramton and Palfrey (1995) and show that when the seller uses a second-price auction with participation costs, the standard effcient cartel mechanisms such as preauction knockouts analyzed in the literature will not be ratified by cartel members. A high-value bidder benefits from vetoing the cartel mechanism since doing so sends a credible signal that she has high value, which in turn discourages other bidders from participating in the seller's auction.

JEL Classifications:C72, D44, D82

Keywords:Auctions, collusion, ratifiability

IEPR 05.14

Testing Slope Homogeneity in Large Panels

M. Hashem Pesaran and Takashi Yamagata

Abstract: This paper proposes a modified version of Swamy's test of slope homogeneity for panel data models where the cross section dimension (N) could be large relative to the time series dimension (T). The proposed test exploits the cross section dispersion of individual slopes weighted by their relative precision. In the case of models with strictly exogenous regressors and normally distributed errors, the test is shown to have a standard normal distribution as (N, T) j?8. Under non-normal errors and in the case of stationary dynamic models, the condition on the relative expansion rates of N and T for the test to be valid is given by vN/T ? 0, as (N, T)j?8. Using Monte Carlo experiments, it is shown that the test has the correct size and satisfactory power in panels with strictly exogenous regressors for various combinations of N and T. For autoregressive (AR) models the proposed test performs well for moderate values of the root of the autoregressive process. But for AR models with roots near unity a bias-corrected bootstrapped version of the test is proposed which performs well even if N is large relative to T. The proposed cross section dispersion tests are applied to testing the homogeneity of slopes in autoregressive models of individual earnings using the PSID data. The results show statistically significant evidence of slope heterogeneity in the earnings dynamics, even when individuals with similar educational backgrounds are considered as sub-sets.

JEL Classifications:C12, C33

Keywords:Testing Slope Homogeneity, Hausman Type Tests, Cross Section Dispersion Tests, Monte Carlo Results, PSID Earnings Dynamics

IEPR 05.13

Propensity Score Matching, a Distance-Based Measure of Migration, and the Wage Growth of Young Men

John C. Ham, Xianghong Li, Patricia B. Reagan

Abstract: Our analysis of migration differs from previous research in three important aspects. First, we exploit the confidential geocoding in the NLSY79 to obtain a distance-based measure. Second, we let the effect of migration on wage growth differ by schooling level. Third, we use propensity score matching to measure the effect of migration on the wages of those who move. We develop an economic model and use it to (i) assess the appropriateness of matching as an econometric method for studying migration and (ii) choose the conditioning variables used in the matching procedure. Our data set provides a rich array of variables on which to match. We find a significant effect of migration on the wage growth of college graduates of 10 percent, and a marginally significant effect for high school dropouts of -12 percent. If we use either a measure of migration based on moving across county lines or state lines, the significant effects of migration for college graduates and dropouts disappear.

JEL Classifications:J6, J3, C4

Keywords:Propensity score matching, distance-based migration, wage growth

IEPR 05.12

Inefficiency in Repeated Cournot Oligopoly Games

Harrison Cheng

Abstract: A widely accepted view says that Folk Theorem holds in the repeated Cournot oligopoly games with imperfect price signals satisfying generic conditions. We show that this view is not justi- fied. We argue that maintaining asymptotic joint monopoly outcome is not possible with noisy price signals. When firms have the choice of increasing outputs at equilibrium as a deviation strategy, it is not possible to maintain such collusive outcome, even if the discount rate is close to 1.

JEL Classifications: D23, D8

Keywords:Cournot Oligopoly, inefficiency, repeated games, imperfect price signal, Folk Theorem

IEPR 05.11

Optimal Partnership Contracts: Foundation and Duality

Harrison Cheng

Abstract: We use the duality in linear programming to solve the problem of optimal contracts with moral hazards. We show the importance of allowing the partners to throw away outputs under some contingencies. A two-step procedure is used to find the optimal contracts. The first step minimizes the loss from undistributed outputs, and in the second step, a second best solution is found. A characterization of the optimal contracts in 2-by-2-by-2 partnership games is offered. Such contracts implement an optimal strategy profile which either has no incentive cost to implement or is near a pure strategy profile.

JEL Classifications: D23, D8

Keywords:optimal sharing contracts, partnership games, moral hazards, duality, linear programming

IEPR 05.10

Growth and Inequality: Model Evaluation Based on an Estimation-Calibration Strategy

Hyeok Jeong and Robert M. Townsend

Abstract: This paper evaluates two well-known models of growth with inequality that have explicit micro underpinnings related to household choice. With incomplete markets or transactions costs, wealth can constrain investment in business and the choice of occupation and also constrain the timing of entry into the formal financial sector. Using the Thai Socio-Economic Survey, we estimate the distribution of wealth and the key parameters that best fit cross-sectional data on household choices and wealth. We then simulate the model economies for two decades at the estimated initial wealth distribution and analyze whether the model economies at those micro-fit parameter estimates can explain the observed macro and sectoral aspects of income growth and inequality change. Both models capture important features of Thai reality. Anomalies and comparisons across the two distinct models yield specific suggestions for improved research on the micro foundations of growth and inequality.

JEL Classifications: C52, D31, O41

Keywords:Model Evaluation, Growth and Inequality, Wealth-Constrained Self-Selection

IEPR 05.9

A Theory of Influence: The Strategic Value of Public Ignorance

Isabelle Brocas and Juan D. Carillo

Abstract: We analyze an agency model where one individual decides how much evidence he collects. We assume that he has free access to information, but all the news acquired become automatically public. Conditional on the information disclosed, a second individual with conflicting preferences undertakes an action that affects the payoff of both agents. In this game of incomplete but symmetric information, we show that the first individual obtains rents due to his superior ability to decide whether to collect or forego evidence, i.e., due to his control in the generation of (public) information. We provide an analytical characterization of these rents, that we label "rents of public ignorance". They can be interpreted as, for example, the degree of influence that a chairman can exert on a committee due exclusively to his capacity to decide whether to keep discussions alive or terminate them and call a vote. Last, we show that similar insights are obtained if the agent decides first how much private information he collects and then how much of this information he transmits to the other agent.

Keywords:principal-agent, incomplete and symmetric information, learning, experimentation, optimal stopping rule, informational rents, information control, public ignorance.

IEPR 05.8

Is There an "Iron Law of Happiness"?

Richard A. Easterlin

Abstract: Contrary to the setpoint model of some psychologists, individual happiness does not tend to fluctuate around a constant level. Although the personality and genetic factors emphasized by setpoint theorists are important in explaining individual differences in happiness at a point in time, survey evidence demonstrates that over the life cycle economic circumstances, family life, health, and work are important in determining the course of happiness. However, life events do not necessarily dominate life cycle satisfaction in different domains, and economic theories of well-being would benefit from following psychologists' lead by incorporating goals and adaptation.

JEL Classifications: D60, I31, A12

Keywords:Happiness, Aspirations, Adaptation

IEPR 05.7

Equilibria in Second Price Auctions with Participation Costs

Guofu Tan and Okan Yilankaya

Abstract: We investigate equilibria of sealed-bid second price auctions with bidder participation costs in the independent private values environ- ment. We focus on equilibria in cuto strategies (participate and bid the valuation i¤ it is greater than the cuto), since if a bidder finds it optimal to participate, she cannot do better than bidding her valua- tion. When bidders are symmetric, concavity (strict convexity) of the cumulative distribution function from which the valuations are drawn is a su¢ cient condition for uniqueness (multiplicity) within this class. We also study a special case with asymmetric bidders and show that concavity/convexity plays a similar role.

JEL Classifications: C62, C72, D44, D82

Key Words: Second Price Auctions with Costly Bids