Common agency with informed principals

We analyze a common agency game under asymmetric information on the preferences of the non-cooperating principals. Asymmetric information introduces incentive compatibility constraints which rationalize the requirement of truthfulness made in the earlier literature on common agency games under complete information. There exists a large class of differentiable equilibria which are ex post inefficient and exhibit free-riding. We then characterize some interim efficient equilibria. Finally, there exists also a unique equilibrium allocation which is robust to random perturbations. This focal equilibrium is characterized for any distribution of types.

Reality check for volatility models

Asset allocation decisions and value at risk calculations rely strongly on volatility estimates. Volatility measures such as rolling window, EWMA, GARCH and stochastic volatility are used in practice. GARCH and EWMA type models that incorporate the dynamic structure of volatility and are capable of forecasting future behavior of risk should perform better than constant, rolling window volatility models. For the same asset the model that is the ‘best’ according to some criterion can change from period to period. We use the reality check test∗ to verify if one model out-performs others over a class of re-sampled time-series data. The test is based on re-sampling the data using stationary bootstrapping. For each re-sample we check the ‘best’ model according to two criteria and analyze the distribution of the performance statistics. We compare constant volatility, EWMA and GARCH models using a quadratic utility function and a risk management measurement as comparison criteria. No model consistently out-performs the benchmark.

Signaling in political budget cycles: How far are you willing to go?

This paper analyzes how heterogeneity in two dimensions, competency and character, a¤ects political budget cycles. Competency is the e¢ciency in running the government. Character is the degree of opportunism. In this expanded space, previous results in the literature on the separating nature of the signaling equilibrium hold if heterogeneity in opportunism is low. With high heterogeneity in opportunism, no separating equilibrium exists. Rather, the equilibrium is partially pooling: only extreme types can be distinguished.

Earnings dynamics and inequality in Venezuela: 1995-1997

In this paper, we decompose the variance of logarithmic monthly earnings of prime age males into its permanent and transitory components, using a five-wave rotating panel from the Venezuelan “Encuesta de Hogares por Muestreo” from 1995 to 1997. As far as we know, this is the first time a variance components model is estimated for a developing country. We test several specifications and find that an error component model with individual random effects and first order serially correlated errors fits the data well. In the simplest model, around 22% of earnings variance is explained by the variance of permanent component, 77% by purely stochastic variation and the remaining 1% by serial correlation. These results contrast with studies from industrial countries where the permanent component is predominant. The permanent component is usually interpreted as the results of productivity characteristics of individuals whereas the transitory component is due to stochastic perturbations such as job and/or price instability, among others. Our findings may be due to the timing of the panel when occurred precisely during macroeconomic turmoil resulting from a severe financial crisis. The findings suggest that earnings instability is an important source of inequality in a region characterized by high inequality and macroeconomic instability.

Strategic manipulation of empirical tests

Theories can be produced by individuals seeking a good reputation of knowledge. Hence, a significant question is how to test theories anticipating that they might have been produced by (potentially uninformed) experts who prefer their theories not to be rejected. If a theory that predicts exactly like the data generating process is not rejected with high probability then the test is said to not reject the truth. On the other hand, if a false expert, with no knowledge over the data generating process, can strategically select theories that will not be rejected then the test can be ignorantly passed. These tests have limited use because they cannot feasibly dismiss completely uninformed experts. Many tests proposed in the literature (e.g., calibration tests) can be ignorantly passed. Dekel and Feinberg (2006) introduced a class of tests that seemingly have some power of dismissing uninformed experts. We show that some tests from their class can also be ignorantly passed. One of those tests, however, does not reject the truth and cannot be ignorantly passed. Thus, this empirical test can dismiss false experts.We also show that a false reputation of knowledge can be strategically sustained for an arbitrary, but given, number of periods, no matted which test is used (provided that it does not reject the truth). However, false experts can be discredited, even with bounded data sets, if the domain of permissible theories is mildly restricted.

Phase transition of demand explained by the heterogeneity of consumers' intrinsic preferences

In 1991 Gary S. Becker presented A Note on Restaurant Pricing and Other Examples of Social In uences on Price explaining why many successful restaurants, plays, sporting events, and other activities do not raise their prices even with persistent excess demand. The main reason for this is due to the discontinuity of stable demands, which is explained in Becker's (1991) analysis. In the present paper we construct a discrete time stochastic model of socially interacting consumers deciding for one of two establishments. With this model we show that the discontinuity of stable demands, proposed by Gary S. Becker, depends crucially on an additional factor: the dispersion of the consumers' intrinsic preferences for the establishments.

Using a panel structure to discuss the Feldstein-Horioka puzzle in developing countries

The purpose of this paper is to test the implications of current account solvency for the savinginvestment correlation in developing countries. Since solvency is a long-run phenomenon, and given that the power of the standard unit root and cointegration tests is low, we exploit the panel structure of the sample of 29 developing countries. We find evidence that saving and investment are cointegrated and that the current account is stationary. Therefore, the Feldstein-Horioka correlations are not a puzzle in the sense they reflect the intertemporal budget constraint. The same results are obtained for different subsamples (Africa, Asia, and Latin America) and for different periods of time (1960-74 and 1975-96). We, then, suggest that an error correction model should distinguish between the long-run correlation, which reflects the solvency condition, and the short-run correlation, which could measure capital mobility.

Are the antiglobalizers right?: the issue of trade without a Walrasian auctioneer

This paper analyzes the determinants of expectational coordination on the perfect foresight equilibrium of an open economy in the class of one-dimensional models where the price is determined by price expectations. In this class of models, we relate autarky expectational stability conditions to regional integration ones, providing an intuitive open economy interpretation ofthe elasticities condition obtained by Guesnerie [11]. There, we show that the degree of structural heterogeneity trades-off the existence of standard efficiency gains -due to the increase in competition (spatial price stabilization)- and coordination upon the welfare enhancing free-trade equilibrium (stabilizing price expectations). This trade-off provides a new rationale for an exogenous price intervention at the international levei. Through the coordinational concern of the authority, trading countries are ab]e to fully reap the bene:fits from trade. We illustrate this point showing that classical measures evaluating ex-ante the desirability of economic integration (net welfare gains) do not always advise integration between two expectationally stable economies.

Portfolio choice with a correlated background risk : theory and evidence

We extend the static portfolio choice problem with a small background risk to the case of small partially correlated background risks. We show that respecting the theories under which risk substitution appears, except for the independence of background risk, it is perfectly rational for the individual to increase his optimal exposure to portfolio risk when risks are partially negatively correlated. Then, we test empirically the hypothesis of risk substitutability using INSEE data on French households. We find that households respond by increasing their stockholdings in response to the increase in future earnings uncertainty. This conclusion is in contradiction with results obtained in other countries. So, in light of these results, our model provides an explanation to account for the lack of empirical consensus on cross-country tests of risk substitution theory that encompasses and criticises all of them.

Trust-based trade

There is substantially more trade within national borders than across borders. An important explanation for this fact is the weak enforcement of international contracts. We develop a model in which agents build reputations to overcome this institutional failure. The model describes the interplay between institutional quality, reputations and the dynamics of international trade. It also rationalizes several empirical regularities. We find that history matters for trade volumes, but that its effects vary with the institutional setting of the country. The same is true for the efticacy of trade liberalization programs. Moreover, while stricter enforcement of contracts enhances trade in the short run, it makes it harder for individual traders to develop good reputations. We show that this indirect negative effect may produce an "institutional trap": for sufliciently low initial levels of contract enforcement, a small tightening in enforcement reduces future trade fiows. We find also that search frictions aggravate the problems created by weak enforceability of contracts, even if they impose no direct cost on agents. The model allows extensions in several directions. We outline two of them, indicating how one could study transnational networks and the effects of firm heterogeneity within our structure.

Old-age benefits and retirement decisions of rural elderly in Brazil

I estimate the impact of social security benefits on retirement decisions of rural workers by studying changes in the roles governing social security in Brazil. I focus on a 1991 reform, which brought a reduction in the minimum eligibility age for males and females, a doubling of benefit values and the extension of benefits to non-heads of households. Because beneficiaries are not subject to means or retirement tests, I estimate apure income effect. I find that a reduction in the minimum eligibility age for old-age benefits was an important determinant in the reduction in labor supply of elderly rural workers in Brazil. Finally, I find that benefit take-up rates are larger among the better educated, but least-schooled workers show the largest labor supply responses to the reform.

Common factors in Latin America's business cycles

This paper constructs new business cycle indices for Argentina, Brazil, Chile, and Mexico based on common dynamic factors extracted from a comprehensive set of sectoral output, external trade, fiscal and financial variables. The analysis spans the 135 years since the insertion of these economies into the global economy in the 1870s. The constructed indices are used to derive a business cyc1e chronology for these countries and characterize a set of new stylized facts. In particular, we show that ali four countries have historically displayed a striking combination of high business cyc1e volatility and persistence relative to advanced country benchmarks. Volatility changed considerably over time, however, being very high during early formative decades through the Great Depression, and again during the 1970s and ear1y 1980s, before declining sharply in three of the four countries. We also identify a sizeable common factor across the four economies which variance decompositions ascribe mostly to foreign interest rates and shocks to commodity terms of trade.