Commitment to the behaviorist approach to utility theory, to the usefulness of mathematics in economic analysis, and to equalization of the marginal utility of income as a principle of just taxation brought Irving Fisher and Ragnar Frisch to attempt to measure the marginal utility of income and led them to collaborate in forming the Econometric Society and sponsoring the establishment of the Cowles Commission, institutions advancing economic theory in connection to mathematics and statistics, and led Frisch to pioneer an axiomatic approach to utility and microeconomic theory.
We study equilibria in static entry games with single-dimensional private information. Our framework embeds many models commonly used in applied work, allowing for firm heterogeneity and selective entry. We introduce the notion of strength, which summarizes a firm's ability to endure competition. In environments of applied interest, an equilibrium in which entry strategies are ordered according to the firms' strengths always exists. We call this equilibrium herculean. We derive simple and testable sufficient conditions guaranteeing equilibrium uniqueness and, consequently, a unique counterfactual prediction.
We derive a new formula for the optimal uniform tariff in a small-country, heterogeneous-firm model with roundabout production and a nontraded good. Tariffs are applied on imported intermediate inputs. First-best policy requires that markups on domestic intermediate inputs are offset by subsidies. In a second-best setting where such subsidies are not used, roundabout production and the monopoly distortion in the traded sector create strong incentives to lower the optimal tariff on imported inputs. In a quantitative version of our two-sector small open economy, we find that the optimal tariff is lowered under nearly all parameter values considered, and can be negative.
In panel data on Chinese establishments spanning the 2001 WTO accession, import competition is associated with increases in revenue productivity. We propose a model that interprets this (and additional evidence) as firms choosing to differentiate their products to escape import competition. In the model, the profit from endogenous differentiating is decreasing in trade costs and is an inverted U-shaped function of productivity. We estimate the model and study a counterfactual trade liberalization. In response to import competition, firms differentiate their products and increase their markups, thereby increasing revenue productivity as in the data. Since product differentiation is underprovided by the market, the endogenous differentiation increases welfare relative to a model without firms’ option to differentiate. So, the model rationalizes the positive relationship between import competition and revenue productivity in the data, and it puts forth a new source of gain from trade.
Economic disruptions generally create winners and losers. The compensation problem consists of designing a reform of the existing income tax system that offsets the welfare losses of the latter by redistributing the gains of the former. We derive a formula for the compensating tax reform and its impact on the government budget when only distortionary tax instruments are available and wages are determined endogenously in general equilibrium. We apply this result to the compensation of robotization in the United States.
Manufacturers of durable goods can encourage consumers facing transaction costs to upgrade by accepting used units as trade-ins. These "buyback schemes" increase demand for new units, but increase the supply of used units if trade-ins are resold. I investigate the equilibrium effects of buyback schemes in the market for business jets. I find that buyback increases manufacturer revenue by 7.2 percent at fixed prices. However, in equilibrium this revenue gain is diminished by 43 percent due to substitution away from new jets among first time buyers. I show how the size of this cannibalization effect depends on preference heterogeneity.
We show that Bayesian posteriors concentrate on the outcome distributions that approximately minimize the Kullback–Leibler divergence from the empirical distribution, uniformly over sample paths, even when the prior does not have full support. This generalizes Diaconis and Freedman's (1990) uniform convergence result to, e.g., priors that have finite support, are constrained by independence assumptions, or have a parametric form that cannot match some probability distributions. The concentration result lets us provide a rate of convergence for Berk's (1966) result on the limiting behavior of posterior beliefs when the prior is misspecified. We provide a bound on approximation errors in “anticipated-utility” models, and extend our analysis to outcomes that are perceived to follow a Markov process.
This study provides new mechanisms for identifying and estimating explosive bubbles in mixed-root panel autoregressions with a latent group structure. A postclustering approach is employed that combines k-means clustering with right-tailed panel-data testing. Uniform consistency of the k-means algorithm is established. Pivotal null limit distributions of the tests are introduced. A new method is proposed to consistently estimate the number of groups. Monte Carlo simulations show that the proposed methods perform well in finite samples; and empirical applications of the proposed methods identify bubbles in the U.S. and Chinese housing markets and the U.S. stock market.
In October 1929, the Dutch electronics firm Philips approached John Maynatd Keynes to write confidential reports on the state of the British and world economies, which he did from January 1930 to November 1934, at first monthly and then quarterly. These substantial reports (Keynes’s November 1931 report was twelve typed pages) show Keynes narrating the Great Depression in real time, as the world went through the US slowdown after the Wall Street crash, the Credit-Anstalt collapse in Austria, the German banking crisis (summer 1931), Britain’s departure from the gold exchange standard in August and September 1931, the US banking crisis leading to the Bank Holiday of March 1933, the London Economic Conference of 1933, and the coming of the New Deal. This series of reports has not been discussed in the literature, though the reports and surrounding correspondence are in the Chadwyck-Healey microfilm edition of the Keynes Papers. We examine Keynes’s account of the unfolding events of the early 1930s, his insistence that the crisis would be more severe and long-lasting than most observers predicted, and his changing position on whether monetary policy would be sufficient to promote recovery and relate his reading of contemporary events to his theoretical development.
Kenneth Arrow’s Social Choice and Individual Values (Cowles Monograph No. 12, 1951), a work that established the field of social choice and set the limits for what public economic theory could hope to achieve, was formulated at the Cowles Commission at the University of Chicago from 1947 to 1949 (and during the summer of 1948 at the RAND Corporation) in a context in which concern with using economic theory to guide the economy was intense. During the period just before he shared in developing the Arrow-Debreu-McKenzie proof of existence of general equilibrium, Arrow moved through a series of papers to prove the non-existence of a social welfare function. The context of Arrow’s non-existence proof for aggregation of individual preferences into social welfare function and to Arrow’s shift from trying to prove a possibility theorem for social welfare to proving an impossibility theorem has been confused by a reprinted and influential reminiscence in which Arrow mis-remembered when he had spent a summer at RAND and when he had presented his impossibility theorem to the Econometric Society.