Three principles of competitive nonlinear pricing

We make three contributions to the theory of contracting under asymmetric information. First, we establish a competitive analog to the revelation principIe which we call the implementation principIe. This principIe provides a complete characterization of all incentive compatible, indirect contracting mechanisms in terms of contract catalogs (or menus), and allows us to conclude that in competi tive contracting situations, firms in choosing their contracting strategies can restrict attention, without loss of generality, to contract catalogs. Second, we establish a competi tive taxation principIe. This principIe, a refinement of the implementation principIe, provides a complete characterization of all implementable nonlinear pricing schedules in terms of product-price catalogs and allows us to reduce any game played over nonlinear pricing schedules to a strategically equivalent game played over product-price catalogs. Third, using the competitive taxation principIe and a recent result due to Reny (1999) on the existence of Nash equilibria in discontinuous games, we demonstrate the existence of a N ash equilibrium for the mixed extension of the nonlinear pricing game.

Essays on Spatial Econometrics

Esta dissertação concentra-se nos processos estocásticos espaciais definidos em um reticulado, os chamados modelos do tipo Cliff & Ord. Minha contribuição nesta tese consiste em utilizar aproximações de Edgeworth e saddlepoint para investigar as propriedades em amostras finitas do teste para detectar a presença de dependência espacial em modelos SAR (autoregressivo espacial), e propor uma nova classe de modelos econométricos espaciais na qual os parâmetros que afetam a estrutura da média são distintos dos parâmetros presentes na estrutura da variância do processo. Isto permite uma interpretação mais clara dos parâmetros do modelo, além de generalizar uma proposta de taxonomia feita por Anselin (2003). Eu proponho um estimador para os parâmetros do modelo e derivo a distribuição assintótica do estimador. O modelo sugerido na dissertação fornece uma interpretação interessante ao modelo SARAR, bastante comum na literatura. A investigação das propriedades em amostras finitas dos testes expande com relação a literatura permitindo que a matriz de vizinhança do processo espacial seja uma função não-linear do parâmetro de dependência espacial. A utilização de aproximações ao invés de simulações (mais comum na literatura), permite uma maneira fácil de comparar as propriedades dos testes com diferentes matrizes de vizinhança e corrigir o tamanho ao comparar a potência dos testes. Eu obtenho teste invariante ótimo que é também localmente uniformemente mais potente (LUMPI). Construo o envelope de potência para o teste LUMPI e mostro que ele é virtualmente UMP, pois a potência do teste está muito próxima ao envelope (considerando as estruturas espaciais definidas na dissertação). Eu sugiro um procedimento prático para construir um teste que tem boa potência em uma gama de situações onde talvez o teste LUMPI não tenha boas propriedades. Eu concluo que a potência do teste aumenta com o tamanho da amostra e com o parâmetro de dependência espacial (o que está de acordo com a literatura). Entretanto, disputo a visão consensual que a potência do teste diminui a medida que a matriz de vizinhança fica mais densa. Isto reflete um erro de medida comum na literatura, pois a distância estatística entre a hipótese nula e a alternativa varia muito com a estrutura da matriz. Fazendo a correção, concluo que a potência do teste aumenta com a distância da alternativa à nula, como esperado.

Testing consumption optimality using aggregate data

The objective of this paper is to test for optimality of consumption decisions at the aggregate level (representative consumer) taking into account popular deviations from the canonical CRRA utility model rule of thumb and habit. First, we show that rule-of-thumb behavior in consumption is observational equivalent to behavior obtained by the optimizing model of King, Plosser and Rebelo (Journal of Monetary Economics, 1988), casting doubt on how reliable standard rule-of-thumb tests are. Second, although Carroll (2001) and Weber (2002) have criticized the linearization and testing of euler equations for consumption, we provide a deeper critique directly applicable to current rule-of-thumb tests. Third, we show that there is no reason why return aggregation cannot be performed in the nonlinear setting of the Asset-Pricing Equation, since the latter is a linear function of individual returns. Fourth, aggregation of the nonlinear euler equation forms the basis of a novel test of deviations from the canonical CRRA model of consumption in the presence of rule-of-thumb and habit behavior. We estimated 48 euler equations using GMM, with encouraging results vis-a-vis the optimality of consumption decisions. At the 5% level, we only rejected optimality twice out of 48 times. Empirical-test results show that we can still rely on the canonical CRRA model so prevalent in macroeconomics: out of 24 regressions, we found the rule-of-thumb parameter to be statistically signi cant at the 5% level only twice, and the habit ƴ parameter to be statistically signi cant on four occasions. The main message of this paper is that proper return aggregation is critical to study intertemporal substitution in a representative-agent framework. In this case, we fi nd little evidence of lack of optimality in consumption decisions, and deviations of the CRRA utility model along the lines of rule-of-thumb behavior and habit in preferences represent the exception, not the rule.

Testing consumption optimality using aggregate data

This paper tests the optimality of consumption decisions at the aggregate level taking into account popular deviations from the canonical constant-relative-risk-aversion (CRRA) utility function model-rule of thumb and habit. First, based on the critique in Carroll (2001) and Weber (2002) of the linearization and testing strategies using euler equations for consumption, we provide extensive empirical evidence of their inappropriateness - a drawback for standard rule- of-thumb tests. Second, we propose a novel approach to test for consumption optimality in this context: nonlinear estimation coupled with return aggregation, where rule-of-thumb behavior and habit are special cases of an all encompassing model. We estimated 48 euler equations using GMM. At the 5% level, we only rejected optimality twice out of 48 times. Moreover, out of 24 regressions, we found the rule-of-thumb parameter to be statistically significant only twice. Hence, lack of optimality in consumption decisions represent the exception, not the rule. Finally, we found the habit parameter to be statistically significant on four occasions out of 24.

Moral hazard and nonlinear pricing in a general equilibrium model

The paper analyzes a two period general equilibrium model with individual risk and moral hazard. Each household faces two individual states of nature in the second period. These states solely differ in the household's vector of initial endowments, which is strictly larger in the first state (good state) than in the second state (bad state). In the first period households choose a non-observable action. Higher leveis of action give higher probability of the good state of nature to occur, but lower leveIs of utility. Households have access to an insurance market that allows transfer of income across states of oature. I consider two models of financiaI markets, the price-taking behavior model and the nonlínear pricing modelo In the price-taking behavior model suppliers of insurance have a belief about each household's actíon and take asset prices as given. A variation of standard arguments shows the existence of a rational expectations equilibrium. For a generic set of economies every equilibrium is constraíned sub-optímal: there are commodity prices and a reallocation of financiaI assets satisfying the first period budget constraint such that, at each household's optimal choice given those prices and asset reallocation, markets clear and every household's welfare improves. In the nonlinear pricing model suppliers of insurance behave strategically offering nonlinear pricing contracts to the households. I provide sufficient conditions for the existence of equilibrium and investigate the optimality properties of the modeI. If there is a single commodity then every equilibrium is constrained optimaI. Ir there is more than one commodity, then for a generic set of economies every equilibrium is constrained sub-optimaI.

Existence of nash equilibrium in competitive nonlinear pricing games with adverse selection

We show that for a large class of competitive nonlinear pricing games with adverse selection, the property of better-reply security is naturally satisfied - thus, resolving via a result due to Reny (1999) the issue of existence of Nash equilibrium for a large class of competitive nonlinear pricing games.

Nonlinear pricing beyond the demand profile approach

Wilson [16] introduced a general methodology to deal with monopolistic pricing in situations where customers have private information on their tastes (‘types’). It is based on the demand profile of customers: For each nonlinear tariff by the monopolist the demand at a given level of product (or quality) is the measure of customers’ types whose marginal utility is at least the marginal tariff (‘price’). When the customers’ marginal utility has a natural ordering (i.e., the Spence and Mirrlees Condition), such demand profile is very easy to perform. In this paper we will present a particular model with one-dimensional type where the Spence and Mirrlees condition (SMC) fails and the demand profile approach results in a suboptimal solution for the monopolist. Moreover, we will suggest a generalization of the demand profile procedure that improves the monopolist’s profit when the SMC does not hold.

Forecast comparison with nonlinear methods for brazilian industrial production

Este trabalho avalia as previsões de três métodos não lineares — Markov Switching Autoregressive Model, Logistic Smooth Transition Autoregressive Model e Autometrics com Dummy Saturation — para a produção industrial mensal brasileira e testa se elas são mais precisas que aquelas de preditores naive, como o modelo autorregressivo de ordem p e o mecanismo de double differencing. Os resultados mostram que a saturação com dummies de degrau e o Logistic Smooth Transition Autoregressive Model podem ser superiores ao mecanismo de double differencing, mas o modelo linear autoregressivo é mais preciso que todos os outros métodos analisados.

Forecast comparison with nonlinear methods for Brazilian industrial production

This work assesses the forecasts of three nonlinear methods | Markov Switching Autoregressive Model, Logistic Smooth Transition Auto-regressive Model, and Auto-metrics with Dummy Saturation | for the Brazilian monthly industrial production and tests if they are more accurate than those of naive predictors such as the autoregressive model of order p and the double di erencing device. The results show that the step dummy saturation and the logistic smooth transition autoregressive can be superior to the double di erencing device, but the linear autoregressive model is more accurate than all the other methods analyzed.