On the complexity of rationalizing behavior

We study the complexity of rationalizing choice behavior. We do so by analyzing two polar cases, and a number of intermediate ones. In our most structured case, that is where choice behavior is defined in universal choice domains and satisfies the "weak axiom of revealed preference," finding the complete preorder rationalizing choice behavior is a simple matter. In the polar case, where no restriction whatsoever is imposed, either on choice behavior or on choice domain, finding the complete preordersthat rationalize behavior turns out to be intractable. We show that the task of finding the rationalizing complete preorders is equivalent to a graph problem. This allows the search for existing algorithms in the graph theory literature, for the rationalization of choice.

Electoral competition under the threat of political unrest

We study elections in which one party (the strong party) controls a source of political unrest; e.g., this party could instigate riots if it lost the election. We show that the strong party is more likely to win the election when there is less information about its ability to cause unrest. This is because when theweak party is better informed, it can more reliably prevent political unrest by implementing a ``centrist'' policy. When there is uncertainty over the credibility of the threat, ``posturing'' by the strong party leads to platform divergence.

Adaptive dynamics and the implementation problem with complete information

This paper studies the equilibrating process of several implementationmechanisms using naive adaptive dynamics. We show that the dynamics convergeand are stable, for the canonical mechanism of implementation in Nash equilibrium.In this way we cast some doubt on the criticism of ``complexity'' commonlyused against this mechanism. For mechanisms that use more refined equilibrium concepts,the dynamics converge but are not stable. Some papers in the literatureon implementation with refined equilibrium concepts have claimed that themechanisms they propose are ``simple'' and implement ``everything'' (incontrast with the canonical mechanism). The fact that some of these ``simple''mechanisms have unstable equilibria suggests that these statements shouldbe interpreted with some caution.

On the structural difference between the evolutionary approach of Young and that of Kandori, Mailath and Rob

We provide robust examples of symmetric two-player coordination games in normal form that reveal that equilibrium selection bythe evolutionary model of Young (1993) is essentially different from equilibrium selection by the evolutionary model of Kandori, Mailath and Rob (1993).

Immigration policy with partisan parties

This paper analyzes the political economy of immigration when the salient electoralissue is the level of immigrants and the relevant immigration policy is the expenditurein immigration control. We consider that immigration affects voters? welfarethrough economic and non economic factors. We model political competition `a laWittman with the ideology of parties endogenously determined at equilibrium. Atequilibrium, parties propose different levels of immigration, located to the left and tothe right of the median voter?s ideal point, and combine skilled and unskilled workersamong their constituencies. Numerical simulations provide the levels of immigrationproposed by the two parties and the composition of parties? constituencies as we varythe efficacy of immigration control and the intensity of immigration aversion.

A dynamic analysis of human welfare in a warming planet

Climate science indicates that climate stabilization requires low GHG emissions. Is thisconsistent with nondecreasing human welfare?Our welfare or utility index emphasizes education, knowledge, and the environment. Weconstruct and calibrate a multigenerational model with intertemporal links provided by education,physical capital, knowledge and the environment.We reject discounted utilitarianism and adopt, first, the Pure Sustainability Optimization (orIntergenerational Maximin) criterion, and, second, the Sustainable Growth Optimization criterion,that maximizes the utility of the first generation subject to a given future rate of growth. We applythese criteria to our calibrated model via a novel algorithm inspired by the turnpike property.The computed paths yield levels of utility higher than the level at reference year 2000 for allgenerations. They require the doubling of the fraction of labor resources devoted to the creation ofknowledge relative to the reference level, whereas the fractions of labor allocated to consumptionand leisure are similar to the reference ones. On the other hand, higher growth rates requiresubstantial increases in the fraction of labor devoted to education, together with moderate increasesin the fractions of labor devoted to knowledge and the investment in physical capital.

Measuring risk aversion with lists: A new bias

Various experimental procedures aimed at measuring individual risk aversion involve alist of pairs of alternative prospects. We first study the widely used method by Holt andLaury (2002), for which we find that the removal of some items from the lists yields asystematic decrease in risk aversion. This bias is quite distinct from other confoundsthat have been previously observed in the use of the Holt and Laury method. It may berelated to empirical phenomena and theoretical developments where better prospectsincrease risk aversion. Nevertheless, we have also found that the more recent elicitationmethod due to Abdellaoui et al. (2011), also based on lists, does not display anystatistically significant bias when the corresponding items of the list are removed. Ourresults suggest that methods other than the popular Holt and Laury one may bepreferable for the measurement of risk aversion.

The mean-variance model from the inverse of the variance-covariance matrix

En este artículo, a partir de la inversa de la matriz de varianzas y covarianzas se obtiene el modelo Esperanza-Varianza de Markowitz siguiendo un camino más corto y matemáticamente riguroso. También se obtiene la ecuación de equilibrio del CAPM de Sharpe.

Financial Integration, Trade Openness and International Transmission

[cat] Com afecten l’obertura comercial i financera a la volatilitat macroeconòmica? La literatura existent, tant empírica com teòrica, no ha assolit encara un consens. Aquest article usa un model microfonamentat de dos països simètrics amb entrada endògena d’empreses per estudiar-ho. L’anàlisis es du a terme per tres règims econòmics diferents amb diferents nivells d’integració internacional: una economia tancada, una autarquia financera i una integració plena. Es consideren diversos nivells d’obertura comercial, en forma de biaix domèstic de la demanda i l’economia pot patir pertorbacions en la productivitat del treball i en innovació. El model conclou que la incertesa macroeconòmica, representada principalment per la volatilitat del consum, la producció i la relació real d’intercanvi internacional, depèn del grau d’obertura i del tipus de pertorbació.

Can we identify Walrasian allocations?

[eng] We consider a discrete time, pure exchange infinite horizon economy with two or more consumers and at least one concumption good per period. Within the framework of decentralized mechanisms, we show that for a given consumption trade at any period of time, say at time one, the consumers will need, in general, an infinite dimensional (informational) space to identigy such a trade as an intemporal Walrasian one. However, we show and characterize a set of enviroments where the Walrasian trades at each period of time can be achieved as the equilibrium trades of a sequence of decentralized competitive mechanisms, using only both current prices and quantities to coordinate decisions.

The mean-variance model from the inverse of the variance-covariance matrix

En este artículo, a partir de la inversa de la matriz de varianzas y covarianzas se obtiene el modelo Esperanza-Varianza de Markowitz siguiendo un camino más corto y matemáticamente riguroso. También se obtiene la ecuación de equilibrio del CAPM de Sharpe.

Financial Integration, Trade Openness and International Transmission

[cat] Com afecten l’obertura comercial i financera a la volatilitat macroeconòmica? La literatura existent, tant empírica com teòrica, no ha assolit encara un consens. Aquest article usa un model microfonamentat de dos països simètrics amb entrada endògena d’empreses per estudiar-ho. L’anàlisis es du a terme per tres règims econòmics diferents amb diferents nivells d’integració internacional: una economia tancada, una autarquia financera i una integració plena. Es consideren diversos nivells d’obertura comercial, en forma de biaix domèstic de la demanda i l’economia pot patir pertorbacions en la productivitat del treball i en innovació. El model conclou que la incertesa macroeconòmica, representada principalment per la volatilitat del consum, la producció i la relació real d’intercanvi internacional, depèn del grau d’obertura i del tipus de pertorbació.

Can we identify Walrasian allocations?

[eng] We consider a discrete time, pure exchange infinite horizon economy with two or more consumers and at least one concumption good per period. Within the framework of decentralized mechanisms, we show that for a given consumption trade at any period of time, say at time one, the consumers will need, in general, an infinite dimensional (informational) space to identigy such a trade as an intemporal Walrasian one. However, we show and characterize a set of enviroments where the Walrasian trades at each period of time can be achieved as the equilibrium trades of a sequence of decentralized competitive mechanisms, using only both current prices and quantities to coordinate decisions.

Time scarcity and the market for news

We develop a theory of news coverage in environments of information abundance. News consumersare time-constrained and browse through news items that are available across competingoutlets, choosing which ones to read or skip. Media firms are aware of consumers' preferences andconstraints, and decide on rankings of news items that maximize their profits. We find that, evenwhen readers and outlets are rational and unbiased and when markets are competitive, readersmay read more than they would like to, and the stories they read may be significantly differentfrom the ones they prefer. Next, we derive implications on diverse aspects of new and traditionalmedia. These include a rationale for tabloid news, a theory of optimal advertisement placementin newscasts, and a justification for readers' migration to online media platforms in order to circumventinefficient rankings found in traditional media. We then analyze methods for restoringreader-efficient standards and discuss the political economy implications of the theory.

Endogenous depth of reasoning

We introduce a model of strategic thinking in games of initial response. Unlike standard level-k models, in this framework the player's `depth of reasoning' is endogenously determined, andit can be disentangled from his beliefs over his opponent's cognitive bound. In our approach,individuals act as if they follow a cost-benefit analysis. The depth of reasoning is a function ofthe player's cognitive abilities and his payoffs. The costs are exogenous and represent the gametheoretical sophistication of the player; the benefit instead is related to the game payoffs. Behavioris in turn determined by the individual's depth of reasoning and his beliefs about the reasoningprocess of the opponent. Thus, in our framework, payoffs not only affect individual choices inthe traditional sense, but they also shape the cognitive process itself. Our model delivers testableimplications on players' chosen actions as incentives and opponents change. We then test themodel's predictions with an experiment. We administer different treatments that vary beliefs overpayoffs and opponents, as well as beliefs over opponents' beliefs. The results of this experiment,which are not accounted for by current models of reasoning in games, strongly support our theory.Our approach therefore serves as a novel, unifying framework of strategic thinking that allows forpredictions across games.