the generalized multinomial logit model accounting for scale and coefficient heterogeneity the mixed or heterogeneous multinomial logit mixl model has become popular in a number of fields especially marketing health economics and industrial organization in most applications of the model the vector of consumer utility weights on product attributes is assumed to have a multivariate normal mvn distribution in the population thus some consumers care more about some attributes than others and the iia property of multinomial logit mnl is avoided i e segments of consumers will tend to switch among the subset of brands that possess their most valued attributes the mixl model is also appealing because it is relatively easy to estimate recently however some researchers have argued that the mvn is a poor choice for modelling taste heterogeneity they argue that much of the heterogeneity in attribute weights is accounted for by a pure scale effect i e across consumers all attribute weights are scaled up or down in tandem this implies that choice behaviour is simply more random for some consumers than others i e holding attribute coefficients fixed the scale of their error term is greater this leads to a scale heterogeneity mnl model s mnl here we develop a generalized multinomial logit model g mnl that nests s mnl and mixl by estimating the s mnl mixl and g mnl models on 10 data sets we provide evidence on their relative performance we find that models that account for scale heterogeneity i e g mnl or s mnl are preferred to mixl by the bayes and consistent akaike information criteria in all 10 data sets accounting for scale heterogeneity enables one to account for extreme consumers who exhibit nearly lexicographic preferences as well as consumers who exhibit very random behaviour in a sense we formalize below

trade credit bank lending and monetary policy transmission this paper investigates the role of trade credit in the transmission of monetary policy most models of the transmission mechanism allow the firm to access only financial markets or bank lending according to some net worth criterion in our model we introduce trade credit as an additional source of funding we predict that when monetary policy tightens there will be a reduction in market and bank lending and an increase in trade credit this is confirmed with an empirical investigation of 16 000 manufacturing firms

on the empirics of foreign aid and growth the present paper re examines the effectiveness of foreign aid theoretically and empirically using a standard olg model we show that aid inflows will in general affect long run productivity the size and direction of the impact may depend on policies deep structural characteristics and the size of the inflow the empirical analysis investigates these possibilities overall we find that aid has been effective in spurring growth but the magnitude of the effect depends on climate related circumstances finally we argue that the collier dollar allocation rule should be seriously reconsidered by donor agencies if aid effectiveness is related to climate the usefulness of foreign aid in promoting growth in developing countries has been an area of controversy ever since rosenstein rodan in 1943 advocated for aid to eastern and south eastern europe browsing through successive editions of a leading textbook in development economics provides a telling illustration of how the confidence in aid effectiveness dwindled over the years in the first edition of leading issues in economic development meier 1964 dedicated a full 18 page section to the issue of foreign aid he started out asking how much aid by the time of the sixth edition meier 1995 the treatment of foreign aid had been cut into half and the questions in focus were why official assistance and does aid work in the 2000 edition meier and rauch 2000 foreign aid is not even listed in the index

contract complexity and performance under asymmetric demand information an experimental evaluation exploring the tension between theory and practice regarding complexity and performance in contract design is especially relevant the goal of this paper is to understand why simpler contracts may commonly be preferred in practice despite being theoretically suboptimal we study a two tier supply chain with a single supplier and a single buyer to characterize the impact of contract complexity and asymmetric information on performance and to compare theoretical predictions to actual behavior in human subject experiments in the experiments the computerized buyer faces a newsvendor setting and has better information on end consumer demand than the human supplier the supplier offers either a quantity discount contract with two or three price blocks or a price only contract contracts that are commonplace in practice yet different in complexity results show that contrary to theoretical predictions quantity discounts do not necessarily increase the supplier s profits we also observe a more equitable distribution of profits between the supplier and the buyer than what theory predicts these observations can be described with three decision biases the probabilistic choice bias the reinforcement bias and the memory bias and can be modeled using the experience weighted attraction learning model our results demonstrate that simpler contracts such as a price only contract or a quantity discount contract with a low number of price blocks are sufficient for a supplier designing contracts under asymmetric demand information this paper was accepted by christian terwiesch operations and supply chain management

the principle of minimum differentiation holds under sufficient heterogeneity the so called principle of minimum differentiation stated by hotelling has been challenged by many authors this paper restores the principle by showing that n firms locate at the center of the market and charge prices higher than the marginal cost of production when heterogeneity in consumers tastes is large enough

non parametric frontier estimates of mutual fund performance using c and l moments some specification tests there is a burgeoning literature using non parametric frontier methods to measure mutual fund performance these articles measure the relationship between the various characteristics mainly return information and some costs of ownership of these specialized financial products to establish a ranking using some efficiency measure we argue in favor of the use of the shortage function which is compatible with general investor preferences and question some of the often maintained hypotheses in this line of research the empirical part employs a large database of us and european mutual funds to offer extensive tests of the underlying modeling assumptions using various frontier estimators

estimating shocks and impulse response functions this paper examines the issue of how to identify the shocks in a cointegrated var when the following assumptions are made the variables can be classified as endogenous or exogenous there are as many cointegrating relations as endogenous variables the cointegrating vectors are identified and they contain at least one exogenous variable it is shown that with these assumptions it is possible to identify the shocks without the use of further restrictions on the covariance matrix of the disturbances or the short run dynamics if the long run parameters are known the whole model can be estimated by ols the analysis is extended to allow the var to have both stationary and non stationary variables an illustration of the method is provided using the traditional benchmark var model involving us data on output prices interest rates and money a liquidity effect is not found using this var methodology

decision making in electrical appliance use in the home this paper presents the results of a survey as well as an argument from the viewpoint of behavioral economics with the aim of clarifying how consumers make decisions about electrical appliance use in the home a survey of consumers showed that most have little awareness of the energy efficiency of appliances the price of the services produced by electrical appliances or electricity rates these findings indicate that price does not function as a signal in electricity consumption through electrical appliance use rather we found that consumer decision making in electricity consumption is dependent on the characteristics of the particular electrical appliances they use additionally we argue that the payment system for home electricity consumption plays an important role in decision making causing biases due to aspects of human psychology discussed here in terms of satisficing and heuristics payment decoupling and budgeting we conclude that decision making about electrical appliance use and electricity consumption in the home is not always rational and is affected both by the particular characteristics of appliances and the payment system for electricity consumption along with human psychology

informative advertising with differentiated products in this paper we study the role of promotional expenditures by sellers in a model of product differentiation advertising conveys full and accurate information about the characteristics of products heterogeneous consumers who have no source of information other than advertisements seek to purchase the products that best fit their needs despite the roles played by advertising in improving the matching of products and consumers and in increasing the elasticity of demand faced by each firm we find that the market determined levels of advertising are excessive given the extent of diversity in the market we derive a promotional equilibrium based on a specific information transmission technology paying explicit attention to the structure of consumer information and its impact on firms demand curves this allows us to study the effects of changes in the advertising technology including an increased ability to target messages to specific groups of consumers on the equilibrium in the product market we find that decreased advertising costs may reduce profits by increasing the severity of price competition

bounded rationality and market fluctuations abstract in a model of a competitive market each firm in each period faces a planning problem caused by random changes in circumstances due to bounded rationality a firm is unable to compute costlessly and exactly its optimal output instead the firm approximates optimal output through a decision making process called a deliberation technology this technology involves a rule of thumb a costly deliberation mechanism and a random deliberation error the issue addressed by the model is how bounded rationality affects market fluctuations the first glance intuition is that fluctuations will increase since deliberation error is an added disturbance to the market however the actual effect is much more complicated and might go either way

applied welfare economics with discrete choice models economists have been paying increasing attention to the study of situations in which consumers face a discrete rather than a continuous set of choices such models are potentially very important in evaluating the impact of government programs upon consumer welfare but very little has been said in general regarding the tools of applied welfare economics indiscrete choice situations this paper shows how the conventional methods of applied welfare economics can be modified to handle such cases it focuses on the computation of the excess burden of taxation and the evaluation of quality change the results are applied to stochastic utility models including the popular cases of probit and logit analysis throughout the emphasis is on providing rigorous guidelines for carrying out applied work this abstract was borrowed from another version of this item

complexity effects in choice experiment based models abstract many firms rely on choice experiment based models to evaluate future marketing actions under various market conditions this research investigates choice complexity i e number of alternatives number of attributes and utility similarity between the most attractive alternatives and individual differences in decision time as key factors that affect the predictive performance of models based on choice experiments both within and between complexity conditions the results show that complexity and individual decision time not only affect the error in consumer choice models but also consumers decision strategy and systematic utilities the authors introduce a complexity adjusted mixed logit cam logit model to capture the various influences of complexity in choice experiment based models they illustrate the consequences of complexity on choice behavior with market share predictions of the cam logit model for different complexity conditions

maximisation and melioration as alternative forms of firm behavior abstract results from experimental psychology suggest that individuals reliably fail to optimize in cases where pay offs to a binary choice depend on the way similar choices have been distributed over a period of time the paper compares this observed form of behavior melioration with maximisation for illustration time distributed choice is introduced via the expedient of commodity durability and binary choice via market segmentation in a duopoly context it is seen that meliorating firms together or unilaterally may earn more profits than maximizing firms some implications are drawn concerning the question of firm natural selection

samaritan versus rotten kid another look abstract we set up a two stage game with sequential moves by one altruist and n selfish agents the samaritan s dilemma rotten kid theorem states that the altruist can only reach her first best when the selfish agents move after before the altruist we find that in general the altruist can reach her first best when she moves first if and only if a selfish agent s action marginally affects only his own payoff the altruist can reach her first best when she moves last if and only if a selfish agent cannot manipulate the price of his own payoff

trick or treat development opportunities and challenges in the wto negotiations on industrial tariffs negotiations on industrial tariffs in the current wto work programme have turned out to be surprisingly difficult on the one hand developing countries particularly in africa are concerned about the potential negative effect on their industrial development of developed country efforts to push them into deep cuts in applied tariffs after the disillusion of the uruguay round promises of welfare gains seem unconvincing on the other hand a number of the more complex formula proposals for tariff cutting make it difficult for participants to evaluate what they have to do compared with what they hope to receive the developing countries may achieve greater exports and welfare gains from the more ambitious proposals but computations show that these also imply greater imports lower tariff revenues some labour market adjustments and reduced output in some politically sensitive sectors some way of assisting the developing countries in coping with these adjustments is required to take advantage of the opportunities presented by the negotiations

designing discrete choice experiments do optimal designs come at a price in discrete choice experiments design decisions are crucial for determining data quality and costs while high statistical efficiency designs are desirable they may come at a price if they increase the cognitive burden for respondents we address this problem by designing 44 experiments that systematically vary numbers of attributes and attribute level differences our results for two product categories suggest that respondents systematically are less consistent in answering choice questions as statistical efficiency increases this relationship holds regardless of the number of attributes and is statistically significant even if one accommodates preference heterogeneity implications for practice and future research are discussed

exchange rate regimes and inflation only hard pegs make a difference abstract using data from a large sample of developing countries from 1985 to 2001 we confirm that hard pegs currency boards or a shared currency reduce inflation and money growth there is no evidence that soft pegs confer any monetary discipline after other factors are controlled for inflation triggers regime switches under hard pegs monetary growth is unaffected by fiscal deficits or by inflation shocks under soft pegs as under floats increased fiscal deficits and positive inflation shocks are associated with higher monetary growth the apparently slower per capita output growth under hard pegs is explained by their geographical distribution jel classification f41

a transactions theory of trade credit use this paper derives a transactions theory of trade credit use from the motives of trading partners to economize on the joint costs of exchange in the formal analysis uncertain delivery time is used to generate a demand by firms to hold inventories of both goods and money trade credit is viewed as a mechanism that separates the exchange of money from the uncertainty present in the exchange of goods by forewarning both trading partners of the timing of money flows credit permits a reduction in precautionary money holdings and the more effective management of net money accumulations

the costs of global tariff barriers on wool products 1997 2005 the doha round of multilateral trade negotiations commits world trade organization wto members to improving market access for both agricultural and nonagricultural goods tariff barriers on wool products represent a small but important subset of these negotiations to inform the debate on the round we analyze the distortionary effects of recent 1997 2005 tariff barriers on wool products using a model that applies a comprehensive analytical approach with regard to the production trade and consumption of wool products we also account for any indirect effects of wool tariff barriers on the nonwool economy by incorporating the production trade and consumption of nonwool products that is the framework is a comparative static global general equilibrium model with a detailed representation of the world wool market changes in wool tariffs over 1997 2005 lead to positive welfare effects for most regions italy china and the uk are estimated to have gained the most from the changes the results indicate that the nature of recent wool tariffs severely distort the size of wool industries in different regions the changes in the output of wool commodities are extreme reflecting the discriminatory nature of the tariffs

formula approaches for market access negotiations textabstractmost of the large tariff reductions achieved in multilateral trade negotiations have involved tariff cutting formulas such as the swiss formula however wide variations in initial tariff rates between active participants call for new approaches under the doha development agenda this paper surveys a range of formula options and examines both targeted and flexible applications of the swiss formula that target tariff escalation and peaks and would allow policy makers to directly target how far they will move towards free trade while providing some flexibility for trading off reductions in peak tariffs against reductions in lower tariff sectors

the aftermath of a currency collapse how different are emerging markets in currency crises unlike in orderly devaluations the financial markets dominate events previous research has shown that the output effects of a crisis tend to be worse in emerging markets and the current account adjustment greater this paper examines the evolution of a wider range of macroeconomic variables from two years before a currency collapse to two years afterwards on the basis of twelve recent episodes it is shown that currency collapses crises followed by depreciations have had a much greater adverse impact in emerging markets defined as relatively high income developing countries exposed to international capital markets than in developed countries there is greater nominal and real depreciation a substantial inflation shock a much bigger output effect and far greater import compression whilst inflows of portfolio capital virtually cease these differences are statistically significant nevertheless there is wide variation n the post collapse experience of the six emerging markets studied mexico thailand korea indonesia russia and brazil although all six experienced a sudden stop or even a reversal of capital flows and very sharp nominal depreciations inflation remained low in thailand korea and brazil and output losses were comparatively small in russia and brazil previous studies of individual crises suggest that important factors are the state of the banking system and its vulnerability to currency movements the ability of the authorities to establish a credible macroeconomic policy after the collapse and whether the crisis triggers significant political instability

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

spatial price discrimination with heterogeneous products product heterogeneity is introduced into the context of spatial price discrimination many of the strong properties of the standard homogeneous goods case which are attained as a limit case here are shown to be no longer valid in particular the social optimum is no longer sustainable as a market equilibrium unless products are either identical or else very different

does the fed act gradually a var analysis abstract the tendency for changes in the federal funds rate to be implemented gradually has been considered evidence of an interest rate smoothing objective for the federal reserve this paper investigates whether gradual funds rate movements can be explained by the dynamic structure of the economy and the uncertainty surrounding that structure without recourse to including an ad hoc interest rate smoothing argument in the fed s objective function in the absence of parameter uncertainty the optimal policy involves more aggressive movements in the funds rate than observed parameter uncertainty however limits the responsiveness of the interest rate as a result the optimal policy under parameter uncertainty can account for a considerable portion of the gradualism observed

learning and fatigue effects revisited investigating the effects of accounting for unobservable preference and scale heterogeneity using multiple choice tasks per respondent in discrete choice experiment studies increases the amount of available information however respondents learning and fatigue may lead to changes in observed utility function preference taste parameters as well as the variance in its error term scale they need to be controlled to avoid potential bias a sizable body of empirical research offers mixed evidence in terms of whether these ordering effects are observed we point to a significant component in explaining these differences we show how accounting for unobservable preference and scale heterogeneity can influence the magnitude of observed ordering effects

the case for forecast targeting as a monetary policy strategy at central banks around the world forecasts have come to play an increasingly important role both in policy deliberations and in communications with the public the most striking examples are the bank of england sweden s riksbank norway s norges bank and the reserve bank of new zealand all of which conduct policy on the basis of a procedure sometimes referred to as inflation forecast targeting svensson 1997 1999 under this approach the central bank constructs quantitative projections of the economy s expected future evolution based on the way in which it intends to control short term interest rates and public discussion of those projections is a critical part of the way in which the bank justifies the conduct of policy to the public what accounts for the appeal of a forecast targeting approach and should it be adopted more widely or more explicitly i begin by reviewing the long running debate between the proponents of monetary rules intended to ensure confidence in the value of money over time and the proponents of discretionary monetary policy aimed at stabilizing the real economy i will argue that inflation forecast targeting represents a powerful synthesis of the two approaches in particular it is an improvement both over simpler rules such as targeting a monetary aggregate and over weaker versions of inflation targeting i shall also argue that a much more extensive communication policy is crucial to escaping from the limitations of the traditional alternatives of rigid rules or rudderless discretion i will then explore some common questions that arise about inflation forecast targeting should only the inflation forecast matter and if not in what way should forecasts of other economic variables affect policy decisions what assumptions about the course of future policy should be used in constructing the quantitative projections that are presented to the public finally given that economic forecasts

optimal control of heteroscedastic macroeconomic models summary this paper analyses the implications of heteroscedasticity for optimal macroeconomic policy and welfare we find that changes in the variance structure driven by exogenous processes like generalized autoregressive conditional heteroscedasticity garch affect welfare but not the optimal feedback rule however changes in the variance structure driven by state dependent processes affect both we also derive certainty equivalent transformations of state dependent volatility models that allow standard quadratic dynamic programming algorithms to be employed to study optimal policy these results are illustrated numerically using a reduced form model of the us economy in which changes in volatility are driven by a garch process and the rate of inflation copyright 2015 john wiley sons ltd

the influence of task complexity on consumer choice a latent class model of decision strategy switching the literature indicating that person context and task specific factors cause consumers to utilize different decision strategies has generally failed to affect the specification of choice models used by practitioners and academics alike who still tend to assume an utility maximizing omniscient indefatigable consumer this article 1 introduces decision strategy selection within a maintained compensatory framework into aggregate choice models via latent classes which arise because of task complexity 2 it demonstrates that within an experimental choice task the model reflects changing aggregate preferences as choice complexity changes and as the task progresses the import of these findings for current practice model interpretation and future research needs is examined

designing choice sets for stated preference methods the effects of complexity on choice consistency abstract we vary the complexity of choice sets used in stated preference methods to evaluate the impact on choice consistency we define five measures of complexity that capture either the amount of information or the correlational structure of information in a choice set using these measures as randomly assigned treatments in a large experiment we analyze the consistency of respondents choices using a heteroskedastic multinomial logit model we find that i all of our measures of choice set complexity affect choice consistency ii changes in the correlational structure of information have the largest impact on choice consistency and iii choice complexity significantly distorts welfare estimates our results confirm economists initial worry that moving from contingent valuation to conjoint methods will increase complexity induced choice inconsistency however our analysis also shows that these negative impacts may be mitigated if precautions are taken at the design and estimation stages of stated preference methods

optimal monetary policy using an unrestricted var this paper proposes a simple benchmark for monetary policy assuming the true model of the economy is unknown it is based on an unrestricted vector autoregression var the key result is that instead of deriving optimal policy using the original var equations as the constraint when no restriction is placed on the correlation structure of the var disturbances the constraint should be formed from a transformation of the var this method is applied to the usa 1964 2009 significant welfare gains are found compared with actual policy and using a taylor rule incorporating a zero interest rate lower bound lowers output and inflation

what is wrong with taylor rules using judgment in monetary policy through targeting rules it is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule e ither ageneral targeting rule explicit objectives for monetary policy or a specific targeting rule a criterion for the forecasts of the target variables to be fulfilled essentially the equality of the marginal rates of transformation and substitution between the target variables targeting rules allow the use of judgment and extramodel information are more robust and easier to verify than optimal instrument rules and they can nevertheless bring the economy close to the socially optimal equilibrium

rational choice under an imperfect ability to choose we consider an individual who lacks the information processing capacity required for a direct comparison of all feasible allocations instead of finding at once a best allocation the individual myopically adjusts his current allocation toward higher utility the individual makes adjustment errors inversely proportional to his ability to choose we compare the stationary state of this process with the standard model we see how an imperfect ability to choose modifies both positive and normative predictions of the standard model and how the standard model can be obtained from our more general one as the special case corresponding to perfect ability jel d 11

do measures of monetary policy in a var make sense no in many vector autoregressions vars monetary policy shocks are identified with the least squares residuals from a regression of the federal funds rate on an assortment of variables such regressions appear to be structurally fragile and are at odds with other evidence on the nature of the u s federal reserve s reaction function furthermore the residuals from these regressions show little correlation across various vars or with funds rate shocks that are derived from forward looking financial markets my results provide a sharp critique of current monetary vars

assessing the lucas critique in monetary policy models empirical estimates of monetary policy rules suggest that the behavior of u s monetary policymakers changed during the past few decades however for that same time period statistical analyses of lagged representations of the economy such as vars often have not rejected the null of structural stability these two sets of empirical results appear to contradict the lucas critique this paper reconciles these results with the lucas critique by showing that the apparent policy invariance of reduced forms is consistent with the magnitude of historical policy shifts and the relative insensitivity of the reduced forms of plausible forward looking macroeconomic specifications to policy shifts

costly predation and the distribution of competence an evolutionary game model shows how an equilibrium distribution of competence may evolve when members of a population prey on one another but when predatory competence is costly to acquire under one interpretation the competence distribution is an endogenously determined distribution of bounded rationality an example shows how tricksters and suckers might coexist in the long run the analysis leads to a curious result about a mixed equilibrium for a symmetric zero sum game an increase in the costs of one or more competence levels has exactly zero effect on the fraction of the population at those levels