Anufriev, M & Bottazzi, G 2012, 'Asset Pricing with Heterogeneous Investment Horizons', STUDIES IN NONLINEAR DYNAMICS AND ECONOMETRICS, vol. 16, no. 4, pp. 1-36.
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We consider an analytically tractable asset pricing model describing the trading activity in a stylized market with two assets. Traders are boundedly rational expected utility maximizers with different beliefs about future prices and different investment horizons. In particular, we analyze the effects of the latter source of heterogeneity on the dynamics of price. We find that in the case with homogeneous agents, longer investment horizons lead to more stable dynamics. This is not true, however, in the case of a mixed population of traders, when the increase of heterogeneity in the investment horizons can introduce instability in the system. Furthermore, the role of heterogeneity turns out to be different for different trading behaviors and its effect on the aggregate dynamics depends on the whole ecology of agents' beliefs.
Anufriev, M & Hommes, C 2012, 'Evolution of market heuristics', KNOWLEDGE ENGINEERING REVIEW, vol. 27, no. 2, pp. 255-271.
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The time evolution of aggregate economic variables, such as stock prices, is affected by market expectations of individual investors. Neoclassical economic theory assumes that individuals form expectations rationally, thus forcing prices to track economic fundamentals and leading to an efficient allocation of resources. However, laboratory experiments with human subjects have shown that individuals do not behave fully rationally but instead follow simple heuristics. In laboratory markets, prices may show persistent deviations from fundamentals similar to the large swings observed in real stock prices. Here we show that evolutionary selection among simple forecasting heuristics can explain coordination of individual behavior, leading to three different aggregate outcomes observed in recent laboratory market-forecasting experiments: slow monotonic price convergence, oscillatory dampened price fluctuations, and persistent price oscillations. In our model, forecasting strategies are selected every period from a small population of plausible heuristics, such as adaptive expectations and trend-following rules. Individuals adapt their strategies over time, based on the relative forecasting performance of the heuristics. As a result, the evolutionary switching mechanism exhibits path dependence and matches individual forecasting behavior as well as aggregate market outcomes in the experiments. Our results are in line with recent work on agent-based models of interaction and contribute to a behavioral explanation of universal features of financial markets.
Anufriev, M & Hommes, C 2012, 'Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing Experiments', AMERICAN ECONOMIC JOURNAL-MICROECONOMICS, vol. 4, no. 4, pp. 35-64.
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In recent "learning to forecast" experiments (Hommes et al. 2005), three different patterns in aggregate price behavior have been observed: slow monotonic convergence, permanent oscillations, and dampened fluctuations. We show that a simple model of individual learning can explain these different aggregate outcomes within the same experimental setting. The key idea is evolutionary selection among heterogeneous expectation rules, driven by their relative performance. The out-of-sample predictive power of our switching model is higher compared to the rational or other homogeneous expectations benchmarks. Our results show that heterogeneity in expectations is crucial to describe individual forecasting and aggregate price behavior. (JEL C53, C91, D83, D84, G12)
Anufriev, M, Bottazzi, G, Marsili, M & Pin, P 2012, 'Excess covariance and dynamic instability in a multi-asset model', JOURNAL OF ECONOMIC DYNAMICS & CONTROL, vol. 36, no. 8, pp. 1142-1161.
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The presence of excess covariance in financial price returns is an accepted empirical fact: the price dynamics of financial assets tend to be more correlated than their fundamentals would justify. We advance an explanation of this fact based on an intertemporal equilibrium multi-assets model of financial markets with an explicit and endogenous price dynamics. The market is driven by an exogenous stochastic process of dividend yields paid by the assets that we identify as market fundamentals. The model is rather flexible and allows for the coexistence of different trading strategies. The evolution of assets price and traders' wealth is described by a high-dimensional stochastic dynamical system. We identify the equilibria of the model consistent with a baseline assumption of procedural rationality. We show that these equilibria are characterized by excess covariance in prices with respect to the dividend process. Moreover, we show that in equilibrium there is a positive expected marginal profit in choosing more risky portfolios. As a consequence, the evolutionary pressure generates a trend towards more remunerative strategies, which, in turn, increase the variance of prices and the dynamic instability of the system.
Baddeley, M & Parkinson, S 2012, 'Group decision-making: An economic analysis of social influence and individual difference in experimental juries', The Journal of Socio-Economics, vol. 41, no. 5, pp. 558-573.
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Cason, TN, Sheremeta, RM & Zhang, J 2012, 'Communication and efficiency in competitive coordination games', Games and Economic Behavior, vol. 76, no. 1, pp. 26-43.
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Costless pre-play communication has been found to effectively facilitate coordination and enhance efficiency in games with Pareto-ranked equilibria. We report an experiment in which two groups compete in a weakest-link contest by expending costly efforts. Allowing intra-group communication leads to more aggressive competition and greater coordination than control treatments without any communication. On the other hand, allowing inter-group communication leads to less destructive competition. As a result, intra-group communication decreases while inter-group communication increases payoffs. Our experiment thus provides an example of an environment where communication can either enhance or damage efficiency. This contrasts sharply with experimental findings from public goods and other coordination games, where communication always enhances efficiency and often leads to socially optimal outcomes. © 2012 Elsevier Inc..
Chiarella, C & Di Guilmi, C 2012, 'The Fiscal Cost of Financial Instability', STUDIES IN NONLINEAR DYNAMICS AND ECONOMETRICS, vol. 16, no. 4, pp. 1-27.
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This paper presents an agent based model that investigates the possible outcomes of different fiscal and regulatory policies in a financially fragile economy. We analyse the consequences of the attempt by the government to counteract a downturn when it ignores the debt dynamics as modelled by Fisher and Minsky. In particular, we formulate an educated guess about the burden that the government and the taxpayer must bear when a bubble bursts, and its relationship with the extent of government intervention and the taxation system. We also evaluate the outcomes of possible alternatives or complementary regulatory policies. We model four different scenarios treating separately a tax on profits and a tax on private wealth and, for both of them, we specify two cases depending on whether the financial system is able to autonomously generate liquidity. Therefore, we can assess the effect of endogenous money and endogenous credit on the different stabilization policies.
Dardanoni, V, Fiorini, M & Forcina, A 2012, 'Stochastic monotonicity in intergenerational mobility tables', Journal of Applied Econometrics, vol. 27, no. 1, pp. 85-107.
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SUMMARYThe aim of this paper is to test for stochastic monotonicity in intergenerational socio‐economic mobility tables. In other words, we question whether having a parent from a high socio‐economic status is never worse than having one with a lower status. Using existing inferential procedures for testing unconditional stochastic monotonicity, we first test a set of 149 intergenerational mobility tables in 35 different countries and find that monotonicity cannot be rejected in hardly any table. In addition, we propose new testing procedures for testing conditional stochastic monotonicity and investigate whether monotonicity still holds after conditioning on a number of covariates such as education, cognitive and non‐cognitive skills. Based on the NCDS cohort data from the UK, our results provide evidence that monotonicity holds, even conditionally. Moreover, we do not find large differences in our results when comparing social class and wage class mobility. Copyright © 2010 John Wiley & Sons, Ltd.
Delavande, A & Kohler, H-P 2012, 'The Impact of HIV Testing on Subjective Expectations and Risky Behavior in Malawi', Demography, vol. 49, no. 3, pp. 1011-1036.
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Abstract We investigate the causal impact of learning HIV status on HIV/AIDS-related expectations and sexual behavior in the medium run. Our analyses document several unexpected results about the effect of learning one’s own, or one’s spouse’s, HIV status. For example, receiving an HIV-negative test result implies higher subjective expectations about being HIV-positive after two years, and individuals tend to have larger prediction errors about their HIV status after learning their HIV status. If individuals in HIV-negative couples also learn the status of their spouse, these effects disappear. In terms of behavioral outcomes, our analyses document that HIV-positive individuals who learned their status reported having fewer partners and using condoms more often than those who did not learn their status. Among married respondents in HIV-negative couples, learning only one’s own status increases risky behavior, while learning both statuses decreases risky behavior. In addition, individuals in sero-discordant couples who learned both statuses are more likely to report some condom use. Overall, our analyses suggest that ensuring that each spouse learns the HIV status of the other, either through couple’s testing or through spousal communication, may be beneficial in high-prevalence environments.
Delavande, A & Manski, CF 2012, 'Candidate preferences and expectations of election outcomes', Proceedings of the National Academy of Sciences, vol. 109, no. 10, pp. 3711-3715.
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Analysis of data from the American Life Panel shows that in the presidential election of 2008 and in multiple statewide elections in 2010, citizens exhibited large differences in their expectations of election outcomes. Expectations were strongly positively associated with candidate preferences, persons tending to believe that their preferred candidate is more likely to win the election. Committed supporters of opposing candidates regularly differed by 20–30% in their assessments of the likelihood that each candidate would win. These findings contribute evidence on the false consensus effect, the empirical regularity that own preferences tend to be positively associated with perceptions of social preferences. We used unique measures of preferences and perceptions that enabled respondents to express uncertainty flexibly. We studied a setting that would a priori seem inhospitable to false consensus—one where persons have little private information on social preferences but substantial common knowledge provided by media reports of election polls.
Docherty, P 2012, 'Long period interest rate rules in a demand-led Kaldor-Pasinetti-Sraffa-Keynes growth model', Journal of Post Keynesian Economics, vol. 34, no. 3, pp. 521-546.
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This paper uses a detailed macroeconomic model characterized by demand-led growth, Sraffian pricing, and the Kaldor-Pasinetti analysis of income distribution at the macrolevel to develop a framework for evaluation of the long-term implications of monetary policy. Focus is placed on the development of interest rate rules that ensure balanced long-run growth with either stable observable unemployment or zero or low underlying unemployment, and comparison is made between these rules and other Post Keynesian policy rules. Strong support is provided for the effectiveness of the Smithin rule, which fixes the real rate of interest although an alternative rationale for this rule is provided.
Fiorini, M 2012, 'FOSTERING EDUCATIONAL ENROLMENT THROUGH SUBSIDIES: THE ISSUE OF TIMING', Journal of Applied Econometrics, vol. 27, no. 5, pp. 741-772.
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SUMMARYThe purpose of this paper is to build a dynamic structural model of educational choices in which cognitive skills shape decisions. The model is estimated by maximum likelihood using cohort data where individuals are observed from birth to the middle of their working life. These data are unique in that they include cognitive skills test scores collected as early as age 7. We then investigate how alternative policies foster educational enrolment. In particular, we simulate the effect of two subsidies different in the timing of disbursement. The first consists of grants assigned directly to individuals aged between 16 and 18. The second is assigned to the parents earlier on, when the cohort is still in its childhood. The latter subsidy affects cognitive skills accumulation and in turn educational choices. Our results suggest that a grant fosters enrolment at the lowest cost but the parental income subsidy generates more welfare as measured by a class of social welfare functions. Nevertheless, these differences in costs and welfare are small. Overall, the results reinforce the view that government investments in cognitive skill accumulation during childhood are worthwhile. However, the results also indicate that such investments should be well structured to ensure a high return. Copyright © 2010 John Wiley & Sons, Ltd.
Garratt, RJ, Walker, M & Wooders, J 2012, 'Behavior in second-price auctions by highly experienced eBay buyers and sellers', EXPERIMENTAL ECONOMICS, vol. 15, no. 1, pp. 44-57.
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We report on sealed-bid second-price auctions that we conducted on the Internet using subjects with substantial prior experience: they were highly experienced participants in eBay auctions. Unlike the novice bidders in previous (laboratory) experiments, the experienced bidders exhibited no greater tendency to overbid than to underbid. However, even subjects with substantial prior experience tended not to bid their values, suggesting that the non-optimal bidding of novice subjects is robust to substantial experience in non-experimental auctions. We found that auction revenue was not significantly different from the expected revenue the auction would generate if bidders bid their values. Auction efficiency, as measured by the percentage of surplus captured, was substantially lower in our SPAs than in previous laboratory experiments.
Gatti, DD, Di Guilmi, C, Gallegati, M & Landini, S 2012, 'Reconstructing Aggregate Dynamics in Heterogeneous Agents Models', Revue de l'OFCE, vol. N° 124, no. 5, pp. 117-146.
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The Representative Agent (RA) assumption is a methodological shortcut to bypass the problem of dimensionality which arises in heterogeneous agents model. The reasons for dissatisfaction with the RA assumption are well known and have been forcefully discussed in Kirman (1992) and Keen (2011). The efforts to overcome the limits of the exact aggregation (Gorman, 1953) led to methods, such as Lewbel (1992), that are still too restrictive in their basic assumptions to realistically depict an economic system. [2][2] For a review on aggregation methods see Gallegati et...
2
As a consequence of the dissatisfaction with the RA approach, a few analytical frameworks have been developed to cope with the dimensionality problem mentioned above. One of the most promising methods has been introduced by Duncan Foley and Masanao Aoki who borrowed from statistical mechanics the concept of mean-field interaction and imported it into economics. [3][3] See Foley (1994); Aoki (1996, 2002); Aoki and Yoshikawa...
3
In the mean-field interaction approach, agents are classified into clusters or sub-systems according to their state with respect to one particular feature (the so-called micro-state, e.g. the level of production for a firm on a scale of production levels). This clustering determines the characteristics and the evolution of the aggregate (the macro-state, e.g. the total level of output). [4][4] An early economic application of mean-field theory... The focus is not on the single agent, but on the number or fraction of agents occupying a certain state of a state-space at a certain time. These numbers or fractions are governed by a stochastic law, that also defines the functional of the probability distributions of aggregate variables and, if they exist, their equilibrium distributions. The stochastic aggregation is then implemented through master equation techniques, that allow for a description of the dynamics of probability flows among states on a space. These probability flows...
Hafalir, IE, Ravi, R & Sayedi, A 2012, 'A near Pareto optimal auction with budget constraints', Games and Economic Behavior, vol. 74, no. 2, pp. 699-708.
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In a setup where a divisible good is to be allocated to a set of bidders with budget constraints, we introduce a mechanism in the spirit of the Vickrey auction. In the mechanism we propose, understating budgets or values is weakly dominated. Since the revenue is increasing in budgets and values, all kinds of equilibrium deviations from true valuations turn out to be beneficial to the auctioneer. We also show that ex-post Nash equilibrium of our mechanism is near Pareto optimal in the sense that all full winnersʼ values are above all full losersʼ values
Johar, M, Savage, E, Stavrunova, O, Jones, G & Keane, M 2012, 'Geographic Differences in Hospital Waiting Times', ECONOMIC RECORD, vol. 88, no. 281, pp. 165-181.
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Access to elective surgery in Australian public hospitals is rationed using waiting lists. In this article, we undertake a DiNardo-Fortin-Lemieux reweighting approach to attribute variation in waiting time to clinical need or to discrimination. Using data from NSW public patients in 2004-2005, we find the discrimination effect dominates clinical need especially in the upper tail of the waiting time distribution. We find evidence of favourable treatment of patients who reside in remote areas and discrimination in favour of patients residing in particular Area Health Services. These findings have policy implications for the design of equitable quality targets for public hospitals.
Lacetera, N, Macis, M & Slonim, R 2012, 'Will There Be Blood? Incentives and Displacement Effects in Pro-Social Behavior', American Economic Journal: Economic Policy, vol. 4, no. 1, pp. 186-223.
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We present evidence from nearly 14,000 American Red Cross blood drives and from a natural field experiment showing that economic incentives have a positive effect on blood donations without increasing the fraction of donors who are ineligible to donate. The effect increases with the incentive's economic value. However, a substantial proportion of the increase in donations is explained by donors leaving neighboring drives without incentives to attend drives with incentives; this displacement also increases with the economic value of the incentive. We conclude that extrinsic incentives stimulate pro-social behavior, but unless displacement effects are considered, the effect may be overestimated. (JEL D64, H41, I12)
Maruyama, S 2012, 'Estimation of Finite Sequential Games', UNSW Australian School of Business Research Paper, vol. 178, no. 2010, pp. 716-726.
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Maruyama, S & Yin, Q 2012, 'The opportunity cost of exercise: Do higher-earning Australians exercise longer, harder, or both?', Health Policy, vol. 106, no. 2, pp. 187-194.
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Despite the widely documented benefits of exercise, very little is known about how individuals make the decision on exercise. In particular, the decision on the intensity of exercise has attracted only one US study to date, which tests the hypothesis that individuals shift toward less time-intensive but more physically intensive forms of exercise as their wages increase. In this article, we revisit this hypothesis by employing a more credible empirical framework. Studying Australian data we confirm that higher-income Australians tend to exercise more frequently with a longer duration and a higher intensity of exercise. Exercise regimens individualised based on the behavioural patterns of exercise across socio-economic groups will contribute to the efficiency and efficacy of the exercise promotion. © 2012 Elsevier Ireland Ltd.
Mukherjee, A & Vasconcelos, L 2012, 'Star Wars: Exclusive Talent and Collusive Outcomes in Labor Markets', Journal of Law, Economics, and Organization, vol. 28, no. 4, pp. 754-782.
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Siminski, P & Ville, S 2012, 'I Was Only Nineteen, 45 Years Ago: What Can we Learn from Australia’s Conscription Lotteries?', Economic Record, vol. 88, no. 282, pp. 351-371.
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The Australian conscription lotteries of 1965-1972 are a unique and underutilised resource for studying the effects of army service and veterans’ programs. Drawing on many data sources and 25 years of related US literature, we present a comprehensive analysis of this natural experiment, examining indicators of health, personal economic outcomes, family outcomes and educational attainment. We discuss the numerous potential mechanisms involved and the limitations of available data.
Siminski, P & Yerokhin, O 2012, 'Is the Age Gradient in Self-Reported Material Hardship Explained By Resources, Needs, Behaviors, or Reporting Bias?', REVIEW OF INCOME AND WEALTH, vol. 58, no. 4, pp. 715-741.
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Older people report much less hardship than younger people in a range of contexts, despite lower incomes. Hardship indicators are increasingly influential, so the source of this age gradient has considerable policy implications. We propose a theoretical and empirical strategy to decompose the sources of this relationship. We exploit a unique feature of the Household, Income and Labour Dynamics Australia (HILDA) survey, which collects reports of hardship from all adult household members. This facilitates within-couple estimates, allowing us to identify age-related reporting bias. The majority of the raw age-hardship gradient is explained by observed resources, particularly wealth and home ownership. One third of the relationship is explained by unobserved differences between households, which we interpret as age-related behavioral choices. Reporting error does not appear to contribute to the age gradient. © 2011 The Authors. Review of Income and Wealth © 2011 International Association for Research in Income and Wealth.
Stavrunova, O & Yerokhin, O 2012, 'Two-part fractional regression model for the demand for risky assets', APPLIED ECONOMICS, vol. 44, no. 1, pp. 21-26.
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Empirical studies of household portfolio choices are often interested in quantifying the effects of various covariates on the fraction of a households wealth invested in risky assets such as common stocks. The preferred econometric specification in these studies is the two-limit Tobit model, which can accommodate the fractional nature of the dependent variable. However, it is restrictive, because it assumes that the same data generating process determines both whether households participate in the stock market and the fraction of wealth invested in stocks. This article demonstrates that, in this setting, a two-part version of the fractional response model of Papke and Wooldridge (1996) constitutes an attractive alternative to Tobit by comparing the performance of the two models using data on portfolio choices of Australian households. We find that (1) the Tobit model is rejected by our data in favour of a two-part specification; and (2) marginal effects of covariates on the share of risky assets conditional on participation estimated from Tobit are confounded by the effects of these covariates on the participation decision.
Suzuki, T 2012, 'Competitive problem solving and the optimal prize schemes', Games and Economic Behavior, vol. 75, no. 2, pp. 1009-1013.
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Agents compete to solve a problem. Each agent simultaneously chooses either a safe method or a risky method to solve the problem. This paper analyzes a prize scheme as an incentive to induce the optimal risk-taking level which maximizes the designer's interest. It is shown that whenever the winner-take-all scheme induces excessive risk-taking, there exists a prize scheme which induces the optimal risk-taking. Moreover, the existence of such a prize scheme is guaranteed if the number of competitors is sufficiently large.
Suzuki, T 2012, 'Complementarity of behavioral biases', Theory and Decision, vol. 72, no. 3, pp. 413-430.
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I investigate the complementarity of behavioral biases in a simple invest- ment problem. The agent has incomplete knowledge about the correlation between fitness and the decision environment. Nature endows the agent with a decision pro- cedure so that the induced action can reflect this correlation. I show that the agent with this decision procedure always exhibits (i) present biased time preference, (ii) distorted beliefs, and (iii) cognitive dissonance. The three biases are complements and the absence of one of them destroys the value of the other two. The decision procedure also provides insights into the non-fungibility of savings.
Wei, L & Xiao, J 2012, 'Factors affecting the take-off of innovative technologies: evidence from digital cameras', Applied Economics, vol. 44, no. 32, pp. 4143-4152.
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While technological innovations are important for many industries, takeoff sales for innovative products can have long lead times due to a variety of factors. This article identifies the main parameters affecting digital camera take-off sales in the US between 2001 and 2004. The study constructs an empirical model for film and digital camera shipments and finds that digital cameras primarily served as a substitute for low-end film compacts rather than high-end film Single-Lens Reflex (SLR) cameras. Also, growth in household PC ownership and Windows XP market share were the main contributing factors to the decline of film cameras, with PC penetration rate as the most important factor for digital camera diffusion. © 2012 Taylor & Francis.
Young, KL 2012, 'Transnational regulatory capture? An empirical examination of the transnational lobbying of the Basel Committee on Banking Supervision', Review of International Political Economy, vol. 19, no. 4, pp. 663-688.
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In January 2008, institutions across the G-lO countries responsible for regulating banks within their jurisdictions implemented the new Basel Capital Accord, now commonly known as Basel II. This new standard for bank regulation replaces the first Basel Accord adopted in 1988 and introduces several innovations designed to improve the effectiveness of bank regulation and to reduce the likelihood of large bank collapses and the associated possibility of financial instability. Such a new policy framework has important implications for welfare and interest rate policy. A framework that successfully reduces the occurrence of financial crises is also likely to reduce the number of damaging episodes of economic downturn (such as that recently observed in the United States as a result of the subprime crisis) 'and the frequency with which monetary policy needs to be called upon to repair the damage of such downturns. Because interest rates affect the distribution of income, these changes also have potential political economy implications.
ZHANG, J & CASARI, M 2012, 'HOW GROUPS REACH AGREEMENT IN RISKY CHOICES: AN EXPERIMENT', Economic Inquiry, vol. 50, no. 2, pp. 502-515.
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This paper studies how groups resolve disagreement in lottery choices. In an experiment, subjects submit individual proposals, exchange chat messages, and must reach unanimity. Overall, group choices are more coherent and closer to risk neutrality than individuals'. The proposal of the minority prevails in about one instance out of five. About one third of the groups do not reach immediate agreement after communication. In these groups, extrovert subjects are more likely to lead the group outcome than confused or conscientious subjects. The amount, equality, and timing of chat messages help us to predict which choice prevails in the group. (JEL C92, D81)
