Exact Tests for Contemporaneous Correlation of Disturbances in Seemingly Unrelated Regressions.

This paper proposes finite-sample procedures for testing the SURE specification in multi-equation regression models, i.e. whether the disturbances in different equations are contemporaneously uncorrelated or not. We apply the technique of Monte Carlo (MC) tests [Dwass (1957), Barnard (1963)] to obtain exact tests based on standard LR and LM zero correlation tests. We also suggest a MC quasi-LR (QLR) test based on feasible generalized least squares (FGLS). We show that the latter statistics are pivotal under the null, which provides the justification for applying MC tests. Furthermore, we extend the exact independence test proposed by Harvey and Phillips (1982) to the multi-equation framework. Specifically, we introduce several induced tests based on a set of simultaneous Harvey/Phillips-type tests and suggest a simulation-based solution to the associated combination problem. The properties of the proposed tests are studied in a Monte Carlo experiment which shows that standard asymptotic tests exhibit important size distortions, while MC tests achieve complete size control and display good power. Moreover, MC-QLR tests performed best in terms of power, a result of interest from the point of view of simulation-based tests. The power of the MC induced tests improves appreciably in comparison to standard Bonferroni tests and, in certain cases, outperforms the likelihood-based MC tests. The tests are applied to data used by Fischer (1993) to analyze the macroeconomic determinants of growth.

Cooperative VS. Non-cooperative Truels: Little Agreement, but Does that Matter?

It is well-known that non-cooperative and cooperative game theory may yield different solutions to games. These differences are particularly dramatic in the case of truels, or three-person duels, in which the players may fire sequentially or simultaneously, and the games may be one-round or n-round. Thus, it is never a Nash equilibrium for all players to hold their fire in any of these games, whereas in simultaneous one-round and n-round truels such cooperation, wherein everybody survives, is in both the a -core and ß -core. On the other hand, both cores may be empty, indicating a lack of stability, when the unique Nash equilibrium is one survivor. Conditions under which each approach seems most applicable are discussed. Although it might be desirable to subsume the two approaches within a unified framework, such unification seems unlikely since the two approaches are grounded in fundamentally different notions of stability.

Organizational Design of R&D Activities

This paper addresses the question of whether R&D should be carried out by an independent research unit or be produced in-house by the firm marketing the innovation. We define two organizational structures. In an integrated structure, the firm that markets the innovation also carries out and finances research leading to the innovation. In an independent structure, the firm that markets the innovation buys it from an independent research unit which is financed externally. We compare the two structures under the assumption that the research unit has some private information about the real cost of developing the new product. When development costs are negatively correlated with revenues from the innovation, the integrated structure dominates. The independent structure dominates in the opposite case.

Rationalizability of Choice Functions on General Domains without Full Transitivity

The rationalizability of a choice function by means of a transitive relation has been analyzed thoroughly in the literature. However, not much seems to be known when transitivity is weakened to quasi-transitivity or acyclicity. We describe the logical relationships between the different notions of rationalizability involving, for example, the transitivity, quasi-transitivity, or acyclicity of the rationalizing relation. Furthermore, we discuss sufficient conditions and necessary conditions for rational choice on arbitrary domains. Transitive, quasi-transitive, and acyclical rationalizability are fully characterized for domains that contain all singletons and all two-element subsets of the universal set.

Efficiency in Uncertain Cooperative Games

A contingent contract in a transferable utility game under uncertainty specifies an outcome for each possible state. It is assumed that coalitions evaluate these contracts by considering the minimal possible excesses. A main question of the paper concerns the existence and characterization of efficient contracts. It is shown that they exist if and only if the set of possible coalitions contains a balanced subset. Moreover, a characterization of values that result in efficient contracts in the case of minimally balanced collections is provided.

Logique et tests d'hypotheses: reflexions sur les problemes mal poses en econometrie

Dans ce texte, nous analysons les développements récents de l’économétrie à la lumière de la théorie des tests statistiques. Nous revoyons d’abord quelques principes fondamentaux de philosophie des sciences et de théorie statistique, en mettant l’accent sur la parcimonie et la falsifiabilité comme critères d’évaluation des modèles, sur le rôle de la théorie des tests comme formalisation du principe de falsification de modèles probabilistes, ainsi que sur la justification logique des notions de base de la théorie des tests (tel le niveau d’un test). Nous montrons ensuite que certaines des méthodes statistiques et économétriques les plus utilisées sont fondamentalement inappropriées pour les problèmes et modèles considérés, tandis que de nombreuses hypothèses, pour lesquelles des procédures de test sont communément proposées, ne sont en fait pas du tout testables. De telles situations conduisent à des problèmes statistiques mal posés. Nous analysons quelques cas particuliers de tels problèmes : (1) la construction d’intervalles de confiance dans le cadre de modèles structurels qui posent des problèmes d’identification; (2) la construction de tests pour des hypothèses non paramétriques, incluant la construction de procédures robustes à l’hétéroscédasticité, à la non-normalité ou à la spécification dynamique. Nous indiquons que ces difficultés proviennent souvent de l’ambition d’affaiblir les conditions de régularité nécessaires à toute analyse statistique ainsi que d’une utilisation inappropriée de résultats de théorie distributionnelle asymptotique. Enfin, nous soulignons l’importance de formuler des hypothèses et modèles testables, et de proposer des techniques économétriques dont les propriétés sont démontrables dans les échantillons finis.

Exact Nonparametric Two-Sample Homogeneity Tests for Possibly Discrete Distributions.

In this paper, we study several tests for the equality of two unknown distributions. Two are based on empirical distribution functions, three others on nonparametric probability density estimates, and the last ones on differences between sample moments. We suggest controlling the size of such tests (under nonparametric assumptions) by using permutational versions of the tests jointly with the method of Monte Carlo tests properly adjusted to deal with discrete distributions. We also propose a combined test procedure, whose level is again perfectly controlled through the Monte Carlo test technique and has better power properties than the individual tests that are combined. Finally, in a simulation experiment, we show that the technique suggested provides perfect control of test size and that the new tests proposed can yield sizeable power improvements.

An Eigenfunction Approach for Volatility Modeling.

In this paper, we introduce a new approach for volatility modeling in discrete and continuous time. We follow the stochastic volatility literature by assuming that the variance is a function of a state variable. However, instead of assuming that the loading function is ad hoc (e.g., exponential or affine), we assume that it is a linear combination of the eigenfunctions of the conditional expectation (resp. infinitesimal generator) operator associated to the state variable in discrete (resp. continuous) time. Special examples are the popular log-normal and square-root models where the eigenfunctions are the Hermite and Laguerre polynomials respectively. The eigenfunction approach has at least six advantages: i) it is general since any square integrable function may be written as a linear combination of the eigenfunctions; ii) the orthogonality of the eigenfunctions leads to the traditional interpretations of the linear principal components analysis; iii) the implied dynamics of the variance and squared return processes are ARMA and, hence, simple for forecasting and inference purposes; (iv) more importantly, this generates fat tails for the variance and returns processes; v) in contrast to popular models, the variance of the variance is a flexible function of the variance; vi) these models are closed under temporal aggregation.

Upper Semicontinuous Extensions of Binary Relations.

Suzumura shows that a binary relation has a weak order extension if and only if it is consistent. However, consistency is demonstrably not sufficient to extend an upper semi-continuous binary relation to an upper semicontinuous weak order. Jaffray proves that any asymmetric (or reflexive), transitive and upper semicontinuous binary relation has an upper semicontinuous strict (or weak) order extension. We provide sufficient conditions for existence of upper semicontinuous extensions of consistence rather than transitive relations. For asymmetric relations, consistency and upper semicontinuity suffice. For more general relations, we prove one theorem using a further consistency property and another with an additional continuity requirement.

Habit Formation and the Persistence of Monetary Shocks

This paper studies the persistent effects of monetary shocks on output. Previous empirical literature documents this persistence, but standard general equilibrium models with sticky prices fail to generate output responses beyond the duration of nominal contracts. This paper constructs and estimates a general equilibrium model with price rigidities, habit formation, and costly capital adjustment. The model is estimated via Maximum Likelihood using US data on output, the real money stock, and the nominal interest rate. Econometric results suggest that habit formation and adjustment costs to capital play an important role in explaining the output effects of monetary policy. In particular, impulse response analysis indicates that the model generates persistent, hump-shaped output responses to monetary shocks.

Industrial Adjustment: Context, Causes, Impacts and Methods for Analysis

Adjustement is an ongoing process by which factors of reallocated to equalize their returns in different uses. Adjustment occurs though market mechanisms or intrafirm reallocation of resources as a result of changes in terms of trade, government policies, resource availability, technological change, etc. These changes alter production opportunities and production, transaction and information costs, and consequently modify production functions, organizational design, etc. In this paper we define adjustment (section 2); review empirical estimates of the extent of adjustment in Canada and abroad (section 3); review selected features of the trade policy and adjustment context of relevance for policy formulation among which: slow growth, a shift to services, a shift to the Pacific Rim, the internationalization of production, investment distribution communications the growing use of NTB's, changes in foreign direct investment patterns, intrafirm and intraindustry trade, interregional trade flows, differences in micro economic adjustment processes of adjustment as between subsidiaries and Canadian companies (section 4); examine methodologies and results of studies of the impact of trade liberalization on jobs (section 5); and review the R. Harris general equilibrium model (section 6). Our conclusion emphasizes the importance of harmonizing commercial and domestic policies dealing with adjustment (section 7). We close with a bibliography of relevant publications.

Statistical Inference for Computable General Equilibrium Models with Application to a Model of the Moroccan Economy

We study the problem of measuring the uncertainty of CGE (or RBC)-type model simulations associated with parameter uncertainty. We describe two approaches for building confidence sets on model endogenous variables. The first one uses a standard Wald-type statistic. The second approach assumes that a confidence set (sampling or Bayesian) is available for the free parameters, from which confidence sets are derived by a projection technique. The latter has two advantages: first, confidence set validity is not affected by model nonlinearities; second, we can easily build simultaneous confidence intervals for an unlimited number of variables. We study conditions under which these confidence sets take the form of intervals and show they can be implemented using standard methods for solving CGE models. We present an application to a CGE model of the Moroccan economy to study the effects of policy-induced increases of transfers from Moroccan expatriates.

How do Young People Choose College Majors?

Previous studies on the determinants of the choice of college major have assumed a constant probability of success across majors or a constant earnings stream across majors. Our model disregards these two restrictive assumptions in computing an expected earnings variable to explain the probability that a student will choose a specific major among four choices of concentrations. The construction of an expected earnings variable requires information on the student s perceived probability of success, the predicted earnings of graduates in all majors and the student s expected earnings if he (she) fails to complete a college program. Using data from the National Longitudinal Survey of Youth, we evaluate the chances of success in all majors for all the individuals in the sample. Second, the individuals' predicted earnings of graduates in all majors are obtained using Rumberger and Thomas's (1993) regression estimates from a 1987 Survey of Recent College Graduates. Third, we obtain idiosyncratic estimates of earnings alternative of not attending college or by dropping out with a condition derived from our college major decision-making model applied to our sample of college students. Finally, with a mixed multinominal logit model, we explain the individuals' choice of a major. The results of the paper show that the expected earnings variable is essential in the choice of a college major. There are, however, significant differences in the impact of expected earnings by gender and race.

Confidence Regions for Calibrated Parameters in Computable General Equilibrium Models

We consider the problem of accessing the uncertainty of calibrated parameters in computable general equilibrium (CGE) models through the construction of confidence sets (or intervals) for these parameters. We study two different setups under which this can be done.

Simulation-Based Finite-Sample Normality Tests in Linear Regressions

In the literature on tests of normality, much concern has been expressed over the problems associated with residual-based procedures. Indeed, the specialized tables of critical points which are needed to perform the tests have been derived for the location-scale model; hence reliance on available significance points in the context of regression models may cause size distortions. We propose a general solution to the problem of controlling the size normality tests for the disturbances of standard linear regression, which is based on using the technique of Monte Carlo tests.