Nber Working Paper Series
Total Page:16
File Type:pdf, Size:1020Kb
Load more
Recommended publications
-
Complexity and Bounded Rationality in Individual Decision Problems
Complexity and Bounded Rationality in Individual Decision Problems Theodoros M. Diasakos Working Paper No. 90 December 2008 www.carloalberto.org THE CARLO ALBERTO NOTEBOOKS Complexity and Bounded Rationality in Individual Decision Problems¤ Theodoros M. Diasakosy December 2008z ¤I am grateful to Chris Shannon for invaluable advice on this and earlier versions. Discussions with David Ahn, Bob Anderson, Paolo Ghirardato, Shachar Kariv, Botond Koszegi, Matthew Rabin, Jacob Sagi, and Adam Szeidl were of signi¯cant bene¯t. I also received helpful comments from Art Boman, Zack Grossman, Kostis Hatzitaskos, Kristof Madarasz, George Petropoulos, Florence Neymotin, and participants in the Xth Spring Meeting of Young Economists, the 2005 Conference of the Southwestern Economic Association, the 3rd and 5th Conference on Research in Economic Theory and Econometrics, and the 2007 SAET conference. Needless to say, all errors are mine. This research was supported by a fellowship from the State Scholarship Foundation of Greece. yCollegio Carlo Alberto E-mail: [email protected] Tel:+39-011-6705270 z°c 2008 by Theodoros M. Diasakos. Any opinions expressed here are the author's, not of the CCA. Abstract I develop a model of endogenous bounded rationality due to search costs, arising implicitly from the decision problem's complexity. The decision maker is not required to know the entire structure of the problem when making choices. She can think ahead, through costly search, to reveal more of its details. However, the costs of search are not assumed exogenously; they are inferred from revealed preferences through choices. Thus, bounded rationality and its extent emerge endogenously: as problems become simpler or as the bene¯ts of deeper search become larger relative to its costs, the choices more closely resemble those of a rational agent. -
Physics of Risk and Uncertainty in Quantum Decision Making VI Yukalov
Physics of risk and uncertainty in quantum decision making V.I. Yukalov1,2,a and D. Sornette1,3,b 1Department of Management, Technology and Economics, Swiss Federal Institute of Technology, ETH Zurich, Kreuzplatz 5, Zurich 8032, Switzerland 2Bogolubov Laboratory of Theoretical Physics, Joint Institute for Nuclear Research, Dubna 141980, Russia 3Swiss Finance Institute, University of Geneva, CH-1211 Geneva 4, Switzerland Abstract The Quantum Decision Theory, developed recently by the authors, is applied to clarify the role of risk and uncertainty in decision making and in particular in relation to the phe- nomenon of dynamic inconsistency. By formulating this notion in precise mathematical terms, we distinguish three types of inconsistency: time inconsistency, planning para- dox, and inconsistency occurring in some discounting effects. While time inconsistency is well accounted for in classical decision theory, the planning paradox is in contradiction with classical utility theory. It finds a natural explanation in the frame of the Quan- tum Decision Theory. Different types of discounting effects are analyzed and shown to enjoy a straightforward explanation within the suggested theory. We also introduce a gen- eral methodology based on self-similar approximation theory for deriving the evolution equations for the probabilities of future prospects. This provides a novel classification of possible discount factors, which include the previously known cases (exponential or hyperbolic discounting), but also predicts a novel class of discount factors that decay to a strictly positive constant for very large future time horizons. This class may be useful to deal with very long-term discounting situations associated with intergenerational public policy choices, encompassing issues such as global warming and nuclear waste disposal. -
A Model of Time-Inconsistent Misconduct: the Case of Lawyer Misconduct
Fordham Law Review Volume 74 Issue 3 Article 8 2005 A Model of Time-Inconsistent Misconduct: The Case of Lawyer Misconduct Manuel A. Utset Follow this and additional works at: https://ir.lawnet.fordham.edu/flr Part of the Law Commons Recommended Citation Manuel A. Utset, A Model of Time-Inconsistent Misconduct: The Case of Lawyer Misconduct, 74 Fordham L. Rev. 1319 (2005). Available at: https://ir.lawnet.fordham.edu/flr/vol74/iss3/8 This Article is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Law Review by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact [email protected]. A Model of Time-Inconsistent Misconduct: The Case of Lawyer Misconduct Cover Page Footnote Professor of Law, University of Utah, S.J. Quinney College of Law. I would like to thank Nancy McLaughlin, Daniel Medwed, and Linda Smith fo their comments. This article is available in Fordham Law Review: https://ir.lawnet.fordham.edu/flr/vol74/iss3/8 A MODEL OF TIME-INCONSISTENT MISCONDUCT: THE CASE OF LAWYER MISCONDUCT Manuel A. Utset* INTRODUCTION The recent corporate scandals resulted from systematic violations of federal securities laws and state corporate law by managers over long periods of time. This type of systematic managerial misconduct requires the active participation of lawyers or at least their turning a blind eye to manager actions that should arouse their suspicion and a desire to investigate further. Thus, corporate scandals invariably lead scholars and regulators to question the effectiveness of existing regulations of corporate lawyers. -
Ruhr Economic Papers #482 Responsible Editor: Volker Clausen All Rights Reserved
A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Gros, Daniel; Alcidi, Cinzia; Belke, Ansgar; Coutinho, Leonor; Giovannini, Alessandro Working Paper State-of-Play in Implementing Macroeconomic Adjustment Programmes in the Euro Area Ruhr Economic Papers, No. 482 Provided in Cooperation with: RWI – Leibniz-Institut für Wirtschaftsforschung, Essen Suggested Citation: Gros, Daniel; Alcidi, Cinzia; Belke, Ansgar; Coutinho, Leonor; Giovannini, Alessandro (2014) : State-of-Play in Implementing Macroeconomic Adjustment Programmes in the Euro Area, Ruhr Economic Papers, No. 482, ISBN 978-3-86788-548-5, Rheinisch- Westfälisches Institut für Wirtschaftsforschung (RWI), Essen, http://dx.doi.org/10.4419/86788548 This Version is available at: http://hdl.handle.net/10419/97137 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. -
Lectures on Political Competition and Welfare
GV 507: Lectures on Political Competition and Welfare Professor Timothy Besley∗ Michaelmas Term 1999 Contents 1 TheEconomicEnvironment........................ 3 2 RepresentativeDemocracy......................... 5 2.1PolicyChoice............................. 5 2.2Voting................................. 6 2.3Campaigning............................. 7 2.4Entry................................. 7 2.5 Equilibrium .............................. 8 2.6TheDownsianModel......................... 9 2.7TheCitizen-CandidateModel.................... 10 2.8Assessment.............................. 16 3 Normative Analysis of Political Equilibria . ............. 16 3.1 Efficiency............................... 20 3.2DistributionalIssues......................... 23 4 DynamicAnalysis.............................. 28 4.1Anapproachtopolitico-economicequilibrium........... 28 4.2PolicyMakingintheDynamicModel................ 33 4.2.1 FailuretoCommittoFutureCompensation........ 33 4.2.2 StrategicPolicyMaking................... 35 4.2.3 Aggregate Capital Accumulation and Political Equilibrium 36 ∗Disclaimer: These notes are not guaranteed to be error free. Please bring any problems that you notice to the attention of the lecturer. 4.3Assessment.............................. 39 5 AppendixA:Proofs............................. 44 2 1. The Economic Environment There are N citizens who have to make a social decision about a set policies de- noted by x ,where denotes the set of feasible policies. Citizen’s preferences over policy∈ areA denotedAV i (x, j)(wherei =1, ..., -
Fiscal Multipliers During Consolidation: Evidence from the European Union
Working Paper Series Alessandro Cugnasca and Philipp Rother Fiscal multipliers during consolidation: evidence from the European Union No 1863 / October 2015 Note: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB Abstract This paper investigates the impact of fiscal consolidation on economic growth in European Union countries, between 2004 and 2013. We construct a new dataset of exogenous fiscal adjustments, relying on legally binding recommendations issued to countries under Excessive Deficit Procedure, and we identify exogenous policy changes by using this dataset as instrumental variable in a GMM framework. We estimate the size of the fiscal multiplier both in a linear setting as well as in a state- dependent setting, considering four different circumstances: the state of the business cycle, the degree of openness to trade, the composition of the fiscal adjustment and the presence of a stressed credit market, as manifested by an impaired monetary policy transmission. We find that the size of the multiplier varies significantly under the various states: the distribution of multipliers is quite asymmetric, and a few consolidation episodes yield multipliers above one. We find that the composition of the fiscal adjustments is crucial in containing the output cost of consolidation, and in determining its persistence. Fiscal adjustments made via cuts to transfers and subsidies, or via tax increases, are usually associated with multipliers at or below unity, even when the economy is in recession. We also find evidence of confidence effects when consolidation is made under stressed credit markets and high interest rates. -
Dynamic Inconsistency and Inefficiency of Equilibrium Under
Dynamic Inconsistency and Inefficiency of Equilibrium under Knightian Uncertainty∗ Patrick Beissnery Michael Zierhutz March 14, 2019 Abstract This paper extends the theory of general equilibrium with Knightian uncertainty to economies with more than two dates. Agents have incomplete preferences with multiple priors `ala Bewley. These priors are updated in light of new informa- tion. Contrary to the two-date model, the market outcome varies with choice of updating rule. We document two phenomena: First, agents may find it optimal to deviate from their initial trading plans. This dynamic inconsistency may result in Pareto inefficiency, even if the market is dynamically complete. Second, ambiguous probability mass may spread; new information may create new uncertainty. Ei- ther phenomenon is avoided under certain updating rules: Full Bayesian updating guarantees dynamic consistency and Pareto efficiency, while maximum-likelihood updating prevents ambiguity spillovers. We ask whether it is possible to design updating rules that combine both properties. The answer is negative: No such rule exists. JEL Classification: D52; D53; D81 Keywords: Knightian uncertainty, Dynamic consistency, General equilibrium, In- complete markets ∗The authors thank Pablo Beker, Federico Echenique, Georgios Gerasimou, Christian Kellner, Fabio Maccheroni, Filipe Martins-da-Rocha, Frank Riedel, Ronald Stauber, Georg Weizs¨acker, and Jan Werner, as well as participants in the 2018 North American Summer Meeting of the Econometric Society and the workshop on Mathematics of Behavioral Economics and Knightian Uncertainty in Financial Markets at ZiF Bielefeld for helpful comments. M. Zierhut gratefully acknowledges financial support by the German Research Foundation (DFG) under project ZI 1673/1-1. yResearch School of Economics, ANU, 26012 Canberra, Australia, [email protected] zInstitute of Financial Economics, Humboldt University, 10099 Berlin, Germany, michael.zierhut@hu- berlin.de. -
SOLUTIONS Chapter 1 Problem 1.1. Problem 1.2. Because |/0 ^0
SOLUTIONS Chapter 1 Problem 1.1. 2,t-i) = —#2,t-i and Problem 1.2. Because |/0^0. Problem 1.3. a) No, because the deviations do not converge to zero, b) Yes, because the deviations remain bounded. Problem 1.4. a) P = 4 and b) yt = -j/t-i, 2/o = -1: P = 2. Problem 1.5. Prom (1.13) 1 1 + a (7-M)" =« X = i where 5 = 1/(1-a/3). Problem 1.6. A characteristic vector 5 and the corresponding characteristic value A are determined by Xs = Ms, that is, coordi- natewise XjSij = ctS2j and XjS2j — Psij. After multiplication: X'JSIJS2J = a(3sijS2,j- No characteristic vector may have coordinate zero, because then the other coordinate would also be zero. Therefore A^ = a(3. Thus we may normalize as siy3; = 1, that is, AjS2,j = A that is, 52,i = ^/®/f3 and 52,2 = -y/a//3. From (1.20) x0 = £isi + 6^2, whence the given initial state x0 = (#i,o>£2,o) yields ^-. (1.21) pro- vides the solution. 283 284 Solutions Problem 1.7. First we solve the scalar equation #1>t = rriiiXi^-i +wi. We substitute the solution obtained into the scalar equation X2,t = ™>22%i,t-i + ^2i^i,t-i + ^2, and so on. The only complication arises from the exponential terms on the R.H.S., which can be tackled, see (1.36). Problem 1.8. Column j of matrix M shows the image of the unit vector e^, thus magnification and rotation are combined. The characteristic equation is P(X) = A2 - 2p(coscp)A + p2 = 0 [(1.27)- (1.28)], yielding the foregoing characteristic roots. -
Dynamic (Time) Inconsistency
First introduced by Kydland and Prescott in 1977, “Rules rather than Discretion: The Inconsistency of Optimal Plans” Let’s look at the Nobel prize description of this work: Time-consistent Policy In the late 1950s and early 1960s, the conventional wisdom, summarized in the so-called Phillips curve, was that economic policy could permanently reduce Dynamic (Time) unemployment by allowing for high inflation. In the late 1960s and early 1970s, however, several researchers had begun to question this view. Milton Friedman (Laureate in 1976) and Edmund Phelps showed that there exists a long-run equilibrium level of unemployment independently of the Inconsistency rate of inflation. Unemployment can be reduced below this equilibrium level through higher inflation, but only in the short run. In the long run, inflationary expectations and wage increases adjust to actual inflation, which in turn “Dynamic Inconsistency, Cooperation, and brings unemployment back to its equilibrium level. In the article from 1977, Kydland and Prescott extended the theory of economic the Benevolent Dissembling Government” policy. They showed that economic policymakers who cannot commit to a rule in advance often will conduct a policy that gives rise to high inflation, By Stanley Fischer despite their stated objective of low inflation. The Laureates presented this as one of several examples of a general problem in economic policymaking: the time consistency problem. Since then, this concept has been at the forefront of research on – and the formulation of – economic policy. Desirable Policies Often not Implemented A noteworthy example of the time consistency problem can be found in monetary policy. Assume that the objective The essence of the time consistency problem is as follows: of policymakers is low inflation and that they announce a policy which economic policymakers regard as the best such a policy. -
Behavioral Economics: from Theory to Practice Dr
Behavioral economics: from theory to practice dr. Nadezhda Shilova, Faculty of Economics Schiences, NRU HSE Pre-requisites: Students are supposed to be acquainted with the very basic economic concepts taught within the course of microeconomics; some basic knowledge on game theory is also welcomed but not obligatory. Course Type (compulsory, elective, optional) elective/optional Abstract: A usual complaint about economic theory courses we hear from students sounds like "but it does not work like this in real life!" Unfortunately, studying general cases takes too much time to explain that life is a special case of a general rule. During the suggested course we will try to reconcile theory and practice: we will see how mental and emotional filters shape the choice people make personally and as a group. We will also try to understand what is rational choice and you will formulate for yourself what rational patterns to follow (or not to follow) in real life whenever you'll have to make a decision - as a consumer or as a producer or even as a governor. Learning Objectives: Deeper and broader understanding of behavioral patterns; improving own decision making schemes and making better decisions. Course Plan: № Topics Academic/Contact Hours Self-study Lectures Labs Hours 1. Homo Economicus: the concept of rationality in 2 2 2 economics. Rationality VS egoistic behavior. 2. Why economics needed psychologists. Reshaping 4 2 4 cognitive schemes. Heuristics. 3. What also influences our choice: emotions, 2 - 2 institutions, what else? 4. Decisions under uncertainty. Probabilistic 2 2 2 mistakes. 5. Well-being and happiness: what is everything for? 4 2 4 Notion of rationality – again. -
Adam Smith, Behavioral Economist
Journal of Economic Perspectives—Volume 19, Number 3—Summer 2005—Pages 131–145 Adam Smith, Behavioral Economist Nava Ashraf, Colin F. Camerer and George Loewenstein n The Wealth of Nations, published in 1776, Adam Smith famously argued that economic behavior was motivated by self-interest. But 17 years earlier in 1759, I Smith had proposed a theory of human behavior that looks anything but self- interested. In his first book, The Theory of Moral Sentiments, Smith argued that behavior was determined by the struggle between what Smith termed the “passions” and the “impartial spectator.” The passions included drives such as hunger and sex, emotions such as fear and anger, and motivational feeling states such as pain. Smith viewed behavior as under the direct control of the passions, but believed that people could override passion-driven behavior by viewing their own behavior from the perspective of an outsider—the impartial spectator—a “moral hector who, looking over the shoulder of the economic man, scrutinizes every move he makes” (Grampp, 1948, p. 317).1 1 A long-standing dispute has raged over whether Adam Smith’s view of human motivation as expressed in The Theory of Moral Sentiments complements or contradicts the view of human motivation expressed in The Wealth of Nations. Although much has been written about “das Adam Smith problem” of reconciling these texts, most modern Smith scholarship asserts that there is no essential contradiction between the texts. As the editors of the Glasgow Edition of the Works and Correspondence of Adam Smith edition of The Theory of Moral Sentiments write (Raphael and Macfie, 1976, p. -
Dynamic Inconsistency and Monetary Policy Management
Munich Personal RePEc Archive Dynamic Inconsistency and Monetary Policy Management Balaban, Georgiana and Vîntu, Denis Bucharest Academy of Economic Studies 23 June 2010 Online at https://mpra.ub.uni-muenchen.de/56042/ MPRA Paper No. 56042, posted 17 May 2014 18:26 UTC Dynamic inconsistency and monetary policy management Georgiana Balaban Junior teaching assistant, PhD Candidate The Bucharest Academy of Economic Studies, Departament of Economics & Economic Policies, 6, Romana Square, district 1, Bucharest, 010374, PO 22, Romania, e-mail: [email protected] , phone: 0040743100150 Denis Vîntu PhD Candidate The Bucharest Academy of Economic Studies, Doctoral School, 6, Romana Square, district 1, Bucharest, 010374, PO 22, Romania, e-mail: [email protected], phone 0040754937695 Abstract This paper studies the importance of the dynamic inconsistency of monetary policy. The paper is organized as follows: in the first part the concept of dynamic inconsistency is explained; the next sections analyse the the rules versus discretion dilemma and some solutions to counteract the dynamic inconsistency of monetary policy - delegate monetary policy to an independent and conservative central banker; offering to the central banker a performance contract, in which his salary is directly linked to the performance of some important macroeconomic variables such as GDP and inflation rate; inflation targeting strategy. The last section briefly presents the management of monetary policy in Romania after adoption of inflation targeting strategy. Keywords: