In Search of a theory of debt management

A growing literature integrates theories of debt management into models of optimal fiscal policy. One promising theory argues that the composition of government debt should be chosen so that fluctuations in the market value of debt offset changes in expected future deficits. This complete market approach to debt management is valid even when the government only issues non-contingent bonds. A number of authors conclude from this approach that governments should issue long term debt and invest in short term assets. We argue that the conclusions of this approach are too fragile to serve as a basis for policy recommendations. This is because bonds at different maturities have highly correlated returns, causing the determination of the optimal portfolio to be ill-conditioned. To make this point concrete we examine the implications of this approach to debt management in various models, both analytically and using numerical methods calibrated to the US economy. We find the complete market approach recommends asset positions which are huge multiples of GDP. Introducing persistent shocks or capital accumulation only worsens this problem. Increasing the volatility of interest rates through habits partly reduces the size of these simulations we find no presumption that governments should issue long term debt ? policy recommendations can be easily reversed through small perturbations in the specification of shocks or small variations in the maturity of bonds issued. We further extend the literature by removing the assumption that governments every period costlessly repurchase all outstanding debt. This exacerbates the size of the required positions, worsens their volatility and in some cases produces instability in debt holdings. We conclude that it is very difficult to insulate fiscal policy from shocks by using the complete markets approach to debt management. Given the limited variability of the yield curve using maturities is a poor way to substitute for state contingent debt. The result is the positions recommended by this approach conflict with a number of features that we believe are important in making bond markets incomplete e.g allowing for transaction costs, liquidity effects, etc.. Until these features are all fully incorporated we remain in search of a theory of debt management capable of providing robust policy insights.

A Salience Theory of Choice Errors

We study a psychologically based foundation for choice errors. The decision maker applies a preference ranking after forming a 'consideration set' prior to choosing an alternative. Membership of the consideration set is determined both by the alternative specific salience and by the rationality of the agent (his general propensity to consider all alternatives). The model turns out to include a logit formulation as a special case. In general, it has a rich set of implications both for exogenous parameters and for a situation in which alternatives can a¤ect their own salience (salience games). Such implications are relevant to assess the link between 'revealed' preferences and 'true' preferences: for example, less rational agents may paradoxically express their preference through choice more truthfully than more rational agents.

Optimism and commitment: An elementary theory of bargaining and war

We propose an elementary theory of wars fought by fully rational contenders. Two parties play a Markov game that combines stages of bargaining with stages where one side has the ability to impose surrender on the other. Under uncertainty and incomplete information, in the unique equilibrium of the game, long confrontations occur: war arises when reality disappoints initial (rational) optimism, and it persist longer when both agents are optimists but reality proves both wrong. Bargaining proposals that are rejected initially might eventually be accepted after several periods of confrontation. We provide an explicit computation of the equilibrium, evaluating the probability of war, and its expected losses as a function of i) the costs of confrontation, ii) the asymmetry of the split imposed under surrender, and iii) the strengths of contenders at attack and defense. Changes in these parameters display non-monotonic effects.

Theory of mind tasks and executive functions: A systematic review of group studies in neurology.

A growing number of studies have been addressing the relationship between theory of mind (TOM) and executive functions (EF) in patients with acquired neurological pathology. In order to provide a global overview on the main findings, we conducted a systematic review on group studies where we aimed to (1) evaluate the patterns of impaired and preserved abilities of both TOM and EF in groups of patients with acquired neurological pathology and (2) investigate the existence of particular relations between different EF domains and TOM tasks. The search was conducted in Pubmed/Medline. A total of 24 articles met the inclusion criteria. We considered for analysis classical clinically accepted TOM tasks (first- and second-order false belief stories, the Faux Pas test, Happe's stories, the Mind in the Eyes task, and Cartoon's tasks) and EF domains (updating, shifting, inhibition, and access). The review suggests that (1) EF and TOM appear tightly associated. However, the few dissociations observed suggest they cannot be reduced to a single function; (2) no executive subprocess could be specifically associated with TOM performances; (3) the first-order false belief task and the Happe's story task seem to be less sensitive to neurological pathologies and less associated to EF. Even though the analysis of the reviewed studies demonstrates a close relationship between TOM and EF in patients with acquired neurological pathology, the nature of this relationship must be further investigated. Studies investigating ecological consequences of TOM and EF deficits, and intervention researches may bring further contributions to this question.

Hemispheric asymmetry and theory of mind: Is there an association?

Introduction. In autism and schizophrenia attenuated/atypical functional hemispheric asymmetry and theory of mind impairments have been reported, suggesting common underlying neuroscientific correlates. We here investigated whether impaired theory of mind performance is associated with attenuated/atypical hemispheric asymmetry. An association may explain the co-occurrence of both dysfunctions in psychiatric populations. Methods. Healthy participants (n 129) performed a left hemisphere (lateralised lexical decision task) and right hemisphere (lateralised face decision task) dominant task as well as a visual cartoon task to assess theory of mind performance. Results. Linear regression analyses revealed inconsistent associations between theory of mind performance and functional hemisphere asymmetry: enhanced theory of mind performance was only associated with (1) faster right hemisphere language processing, and (2) reduced right hemisphere dominance for face processing (men only). Conclusions. The majority of non-significant findings suggest that theory of mind and functional hemispheric asymmetry are unrelated. Instead of ''overinterpreting'' the two significant results, discrepancies in the previous literature relating to the problem of the theory of mind concept, the variety of tasks, and the lack of normative data are discussed. We also suggest how future studies could explore a possible link between hemispheric asymmetry and theory of mind.

Parts, places, and perspectives : a theory of spatial relations based an mereotopology and convexity

This thesis suggests to carry on the philosophical work begun in Casati's and Varzi's seminal book Parts and Places, by extending their general reflections on the basic formal structure of spatial representation beyond mereotopology and absolute location to the question of perspectives and perspective-dependent spatial relations. We show how, on the basis of a conceptual analysis of such notions as perspective and direction, a mereotopological theory with convexity can express perspectival spatial relations in a strictly qualitative framework. We start by introducing a particular mereotopological theory, AKGEMT, and argue that it constitutes an adequate core for a theory of spatial relations. Two features of AKGEMT are of particular importance: AKGEMT is an extensional mereotopology, implying that sameness of proper parts is a sufficient and necessary condition for identity, and it allows for (lower- dimensional) boundary elements in its domain of quantification. We then discuss an extension of AKGEMT, AKGEMTS, which results from the addition of a binary segment operator whose interpretation is that of a straight line segment between mereotopological points. Based on existing axiom systems in standard point-set topology, we propose an axiomatic characterisation of the segment operator and show that it is strong enough to sustain complex properties of a convexity predicate and a convex hull operator. We compare our segment-based characterisation of the convex hull to Cohn et al.'s axioms for the convex hull operator, arguing that our notion of convexity is significantly stronger. The discussion of AKGEMTS defines the background theory of spatial representation on which the developments in the second part of this thesis are built. The second part deals with perspectival spatial relations in two-dimensional space, i.e., such relations as those expressed by 'in front of, 'behind', 'to the left/right of, etc., and develops a qualitative formalism for perspectival relations within the framework of AKGEMTS. Two main claims are defended in part 2: That perspectival relations in two-dimensional space are four- place relations of the kind R(x, y, z, w), to be read as x is i?-related to y as z looks at w; and that these four-place structures can be satisfactorily expressed within the qualitative theory AKGEMTS. To defend these two claims, we start by arguing for a unified account of perspectival relations, thus rejecting the traditional distinction between 'relative' and 'intrinsic' perspectival relations. We present a formal theory of perspectival relations in the framework of AKGEMTS, deploying the idea that perspectival relations in two-dimensional space are four-place relations, having a locational and a perspectival part and show how this four-place structure leads to a unified framework of perspectival relations. Finally, we present a philosophical motivation to the idea that perspectival relations are four-place, cashing out the thesis that perspectives are vectorial properties and argue that vectorial properties are relations between spatial entities. Using Fine's notion of "qua objects" for an analysis of points of view, we show at last how our four-place approach to perspectival relations compares to more traditional understandings.

Theory of mind and cognitive processes in aging and Alzheimer type dementia: a systematic review.

OBJECTIVES: Theory of mind (ToM) performance in aging and dementia of the Alzheimer type (DAT) has been a growing interest of researchers and recently, theoretical trends in ToM development have led to a focus on determining the cognitive skills involved in ToM performance. The aim of the present review is to answer three main questions: How is ToM assessed in aging and DAT? How does ToM performance evolve in aging and DAT? Do cognitive processes influence ToM performance in aging and DAT? METHOD: A systematic review was conducted to provide a targeted overview of recent studies relating ToM performance with cognitive processes in aging and DAT. RESULTS: RESULTS suggest a decrease in ToM performance, more pronounced in complex ToM tasks. Moreover, the review points up the strong involvement of executive functions, especially inhibition, and reasoning skills in ToM task achievement. CONCLUSION: Current data suggest that the structure of ToM tasks itself could lead to poor performance, especially in populations with reduced cognitive abilities.

Theory of mind and social functioning in first episode psychosis

There is evidence of associations between social functioning and theory of mind performance and between social functioning and negative symptoms in chronic psychosis. This study investigates these associations in those with first episode psychosis who are unaffected by factors related to long-term mental illness. Our first hypothesis states that there is an association between theory of mind and social functioning. The second hypothesis states that there is no association between symptoms of psychosis and social functioning. Methods. Fifty-two individuals with first episode psychosis were assessed for social functioning, theory of mind ability (using the Hinting test with verbal stimuli and the Visual Cartoon test with pictorial stimuli), and symptoms of psychosis. Multivariable logistic regression was used to examine associations. Results. Social functioning and theory of mind were associated when measured by the Hinting test (OR 1.70, 95% CI 1.08, 2.66), but not with the Visual Cartoon test (ToM jokes OR 0.61, 95% CI 0.15, 2.53). There was no association between social functioning and symptoms (psychotic symptoms; OR 0.95, 95% CI 0.81, 1.12; selected negative symptoms; OR 1.33, 95% CI 0.78, 2.25). Conclusions. Theory of mind assessed by verbal stimuli is associated with social functioning in a population with first episode psychosis. These findings may be related to language disorders in psychosis.

War Signals: A Theory of Trade, Trust and Conflict

We construct a dynamic theory of civil conflict hinging on inter-ethnic trust and trade. The model economy is inhabitated by two ethnic groups. Inter-ethnic trade requires imperfectly observed bilateral investments and one group has to form beliefs on the average propensity to trade of the other group. Since conflict disrupts trade, the onset of a conflict signals that the aggressor has a low propensity to trade. Agents observe the history of conflicts and update their beliefs over time, transmitting them to the next generation. The theory bears a set of testable predictions. First, war is a stochastic process whose frequency depends on the state of endogenous beliefs. Second, the probability of future conflicts increases after each conflict episode. Third, "accidental" conflicts that do not reflect economic fundamentals can lead to a permanent breakdown of trust, plunging a society into a vicious cycle of recurrent conflicts (a war trap). The incidence of conflict can be reduced by policies abating cultural barriers, fostering inter-ethnic trade and human capital, and shifting beliefs. Coercive peace policies such as peacekeeping forces or externally imposed regime changes have instead no persistent effects.

Salience theory of choice under risk

We present a theory of choice among lotteries in which the decision maker's attention is drawn to (precisely defined) salient payoffs. This leads the decision maker to a context-dependent representation of lotteries in which true probabilities are replaced by decision weights distorted in favor of salient payoffs. By endogenizing decision weights as a function of payoffs, our model provides a novel and unified account of many empirical phenomena, including frequent risk-seeking behavior, invariance failures such as the Allais paradox, and preference reversals. It also yields new predictions, including some that distinguish it from Prospect Theory, which we test.

A theory of optimal random crackdowns

An incentives based theory of policing is developed which can explain the phenomenon of random “crackdowns,” i.e., intermittent periods of high interdiction/surveillance. For a variety of police objective functions, random crackdowns can be part of the optimal monitoring strategy. We demonstrate support for implications of the crackdown theory using traffic data gathered by the Belgian Police Department and use the model to estimate the deterrence effectof additional resources spent on speeding interdiction.

Toward a theory of labor market institutions

Standard economic analysis holds that labor market rigidities are harmfulfor job creation and typically increase unemployment. But many orthodoxreforms of the labor market have proved difficult to implement because ofpolitical opposition. For these reasons it is important to explain why weobserve such regulations. In this paper I outline a theory of how they may arise and why they fit together. This theory is fully developed in aforthcoming book (Saint-Paul (2000)), to which the reader is referred forfurther details.

An economic theory of church strictness

This paper makes several contributions to the growing literatureon the economics of religion. First, we explicitly introduce spatial-location models into the economics of religion. Second, we offer a newexplanation for the observed tendency of state (monopoly) churches tolocate toward the "low-tension" end of the "strictness continuum" (ina one-dimensional product space): This result is obtained through theconjunction of "benevolent preferences" (denominations care about theaggregate utility of members) and asymmetric costs of going to a moreor less strict church than one prefers.We also derive implications regarding the relationship between religiousstrictness and membership. The driving forces of our analysis, religiousmarket interactions and asymmetric costs of membership, high-light newexplanations for some well-established stylized facts. The analysis opensthe way to new empirical tests, aimed at confronting the implications ofour model against more traditional explanations.