learning to believe in sunspots a number of authors have shown that competitive economies may possess sunspot equilibria that is rational expectations equilibria in which purely extrinsic uncertainty affects equilibrium prices and allocations 2 such results demonstrate that it does not require a lack of faith in the rationality of market participants to believe that competitive markets may be subject to purely speculative fluctuations driven solely by expectations 3 the mere existence of sunspot equilibria as solutions to a system of marketclearing conditions however might not be judged sufficient to indicate that competitive markets with rational participants could ever be subject to speculative instability the sunspot equilibria represent states of affairs in which agents act differently in the case of different realizations of the sunspot variable and it is rational for each agent to do so but it might be thought unlikely that the beliefs of all the participants in the market could ever come to be coordinated so as to bring about an equilibrium of that kind it is rational to believe that sunspots convey information about future states of affairs once the economy is in a sunspot equilibrium but why would rational agents ever begin to believe in such a thing so as to create the conditions under which the belief is rational in order to address such a question one must go beyond the mere statement of the conditions for equilibrium and discussion of what states of affairs satisfy them one must specify an explicit dynamic process according to which the beliefs of agents adjust when out of equilibrium any exercise of this kind is necessarily unsatisfactory as there is no univocal meaning for the postulate of rational behavior outside of an equilibrium it may well be the case that

convergence to rational expectations in a stationary linear game this paper describes several learning processes which converge with probability one to the rational expectations bayesian nash equilibrium of a stationary linear game the learning processes include a test for convergence to equilibrium and a method for changing the parameters of the process when non convergence is indicated this self stabilization property eliminates the need to impose stability conditions on the economic environment convergence to equilibrium is proved for two types of self stabilizing learning mechanisms a centralized forecasting mechanism and a decentralized strategy adjustment process

schooling fertility and the labour market experience of married women a model of career path choice is constructed for a sample of women taken from the 1991 us national household education survey this allows for simultaneity and selection effects in the relationship between regime choice and earning it is established that inter alia expected earnings have a significant impact on the career path and the hours of work chosen by american women the role played by formal schooling and by childrearing in the determination of carrier path is highlighted and implications are discussed

strategic interdependence in models of property rights the concept of strategic interdependence has opened a wide spectrum of explanation beyond the robinson crusoe economy this essay explores the implications of strategic interdependence for the theory of property rights and the new institutional economics schotter it attempts to clarify some of the linkages from institutional economics to micro and macroeconomic theory by considering how property institutions result from strategic interdependence confer payoffs to individual agents and reflect collective choices based on individual preferences

learning in mis specified models and the possibility of cycles abstract i study the problem of a monopolist maximizing a sum of discounted profits facing a linear demand curve whose slope and intercept are unknown i show that if the monopolist has a mis specified model i e if the true slope and intercept lie outside of the support of the monopolist s prior beliefs then actions and beliefs may cycle on every sample path this behavior is shown to be robust to perturbations in the prior true parameter and actions such behavior is not possible if the agent s model is correctly specified instead actions and beliefs necessarily converge

learning in expectation formation with applications to cattle and beef exports the paper briefly considers problems associated with rational expectations and formulates a more general model which allows for situations where economic agents do not immediately arrive at a fully rational solution it incorporates a learning mechanism whereby agents can provisionally adopt hypothetically derived expectations as a basis for comparison with the actual outturns utilizing the resultant past expectational errors as indicators of the likelihood of prospective future outcomes agents make explicit allowance a rational solution thus in situations where complete information is not freely available rationality would be approximated over time by means of a dynamic learning process which is founded on a firm empirical approach this essential empiricism requires that the problem be examined on the basis of direct observation of applied situations therefore the method is implemented and analysed with reference to irish foreign trade in fat cattle carcase and processed beef simultaneous equati

optimal stalling when bargaining this paper analyzes an alternating offer model of bargaining over the sale of an asset in a market such as that for housing in which another agent may come and compete for the right to strike a deal the analysis allows the buyer and seller to have possibly differing views as to how likely such a competition is hence the buyer and the seller disagree about their respective bargaining powers these views adjust to market realizations as the parties learn it is shown that there exists a unique subgame perfect equilibrium which can be explicitly constructed hence conditional on market conditions equilibrium prices and optimal stall lengths that is delay can be found bargaining delay can only occur if there is optimism not pessimism and only if the parties are open to learning as time elapses this delay can occur even for very small levels of optimism and the delay can be for economically significant periods

edmund phelps macroeconomist and social scientist edmund phelps helped change the way we think about macroeconomic theory and policy by introducing imperfect information and costly communication into the theory and deriving their implications for the dynamics of inflation and unemployment phelps treated macroeconomics as a social science whose subject matter is not just the choices people make but how people interact in groups his pioneering efforts in developing a formal theory of the coordination mechanisms governing interactions led the way to a new kind of macroeconomics one that was based on the interplay between the actions and expectations of individual actors instead of being based on postulated relationships between macro aggregates mainstream macroeconomics today projects a view of the economy that differs in important respects from phelps s original vision whereas he portrayed economic interactions as being problematical and uncertain leading to outcomes that intelligent people can adapt to but not anticipate much of macroeconomics now is about the representative agent content to interact with only himself and nature or perhaps at arm s length with the market through an unspecified agency that calculates equilibrium prices and executes preharmonized transactions and people are typically portrayed now as understanding completely up to stochastic error with known distribution all economic forces indeed phelps himself has changed his view on the significance of imperfect anticipation having adopted a structural approach to unemployment that attaches only momentary importance to disappointed expectations as a driving force even so macroeconomics today has a connection with microeconomic reasoning that it never did before phelps and a handful of others transformed the subject and many of the concepts that phelps himself introduced while making these contributions in the 1960s and 1970s remain in

equity and time to sale in the real estate market evidence from the boston condominium market of the early 1990s reveals that an owner s equity position determines his experience as a seller an owner of a property with a high loan to value ratio sets a higher asking price has a higher expected time on the market and if he sells receives a higher price than an owner with proportionately less debt the down payment requirement for purchasers but not incumbent owners provides a simple explanation for this phenomenon among owner occupants the results provide supporting evidence for equity based aggregate theories of price volume movements in the housing market copyright 1997 by american economic association

child support reform and the labor supply of lone mothers in the united kingdom the reform of child support arrangements including their treatment by the welfare system has been on the policy agenda in a number of countries in recent years this paper simulates the impact of a reform that recently has been implemented in the united kingdom the analysis is based on estimates of a model of discrete choice labor supply for a sample of u k lone mothers we suggest that reform will induce a major reduction in welfare expenditures on lone mothers and a significant rise in their labor force participation due to greater work incentives associated with the changes

are ols estimates of the return to schooling biased downward another look the authors examine evidence on bias in ols estimates of the economic return to schooling to study omitted ability bias they use test scores available in the national longitudinal survey of youth as proxies for ability allowing for measurement error in these test scores the authors also explore biases from the endogeneity of schooling or experience or measurement error in these variables in their data ols estimation including test scores appears to be appropriate and indicates an upward bias of roughly 40 percent in the ols estimate ignoring ability this contrasts with evidence from other recent research using different statistical experiments to purge schooling of its correlation with the wage equation error copyright 1995 by mit press

loss aversion in a consumption savings model abstract we propose a model of consumption and saving based on kahneman and tversky s prospect theory that implies a fundamental asymmetry in consumption behavior inconsistent with other models of consumption when there is sufficient income uncertainty a person resists lowering consumption in response to bad news about future income this resistance is greater than the resistance to increasing consumption in response to good news we present empirical evidence from five countries that confirms this behavior

macroeconomics and a bit more reality macroeconomics in its widest sense is a topic which is too diverse to be usefully discussed in a single article i will therefore take a very narrow view of what might be included under this general title and focus my attention on my own main area of interest the development and use of large macro econometric models this is an area which has a long tradition and literature stemming form the pioneering work of tinbergen i937 and the cowles commission klein i950 an extensive survey of the development of modelling may be found in bodkin klein and marwah i99i macroeconometric modelling grew rapidly in importance during the late i950s and the i960s going on to achieve a very influential role inmacroeconomic policy making during the i970s its failure to deliver the detailed economic control which it had seemed to promise then led to a barrage of attacks ranging from disillusion and sceptiscism on the part of policy makers to detailed and well argued acadeinic criticism of the basic methodology of the approach perhaps the most powerful and influential of these academic arguments came from sims i980 in his article macroeconomics and reality sims argued on three quite separate grounds against the basic process of model identification which lies at the heart of the cowles commission methodology firstly that economic theory gives rise to identification restrictions which are typically more complex than those traditionally applied in macroeconometric models in particular he said that theory normally implies complex cross equation restrictions which require system estimation and which cannot be imposed on a single equation basis secondly that traditional identification conditions are often met simply because of the presence of dynamics in the models sims argued that this identification is spurious and technically invalid as purely dynamic terms cannot help in structural identification in the conventional sense finally he said that the importance of expectations effects and the interaction of policy regimes and agents expectations make identification very difficult sims argued that any one of these problems would form a challenging but feasible research agenda but that doing all of these at once would be a programme which is so challenging as to be impossible in the short run he then proposed a methodology based on vector auto regressive var models

what is the role of the asking price for a house abstract this paper considers the role of the asking price in housing transactions both theoretically and empirically significant fractions of housing transactions involve sales prices that are either below or above asking price which might suggest that asking price has limited relevance however many housing transactions involve a sales price exactly equal to asking price a fact that has previously drawn little notice strongly suggesting that asking price does matter the paper develops a model where asking price is neither a binding commitment nor a ceiling yet still directs buyer search and impacts sales price using novel survey data the paper provides empirical evidence consistent with asking price playing a directing role in buyer search consistent with theory this effect is stronger for more atypical houses and in bust markets

learning and convergence to a full information equilibrium are not equivalent support from the spanish ministry of education through grants dgicyt pb90 0132 and pb93 0679 is gratefully acknowledged further support for jun from the cirit generalitat de catalunya is also acknowledged

wage offers and full time and part time employment by british women strong evidence in support of the hypothesis that women receive lower wage offers in part time jobs than in full time jobs is provided by estimation of wage offer functions for british women which control for self selection into these two types of jobs analysis of married women s employment decisions indicates that the difference in a woman s expected wage offers between full time and part time employment is an important determinant of whether she works full time while husband s income mainly affects the decision of whether to work in addition it appears that women who work despite having observed characteristics that discourage employment are much more likely to work part time

genetic algorithm learning and the cobweb model this paper presents the cobweb model in which competitive firms in a market for a single good use a genetic algorithm to update their decision rules about next period production and sales the results of simulations show that the genetic algorithm converges to the rational expectations equilibrium for a wider range of parameter values than other algorithms frequently studied within the context of the cobweb model price and quantity patterns generated by the genetic algorithm are also compared to the data of experimental cobweb economies it is shown that the algorithm can capture several features of the experimental behavior of human subjects better than three other learning algorithms that are considered

pricing efficiency and information use in risky markets information has economic value if it helps estimate the value of something both individuals and society at large are interested in the extent to which information about an object s value is contained in its market price apart from distributional issues society s interest is that price guide resource allocation so as to maximize value weighted production prices that would induce such efficient resource use are themselves efficient the purpose of the present paper is to distinguish various notions of an efficient price and to discuss problems in the assessment and achievement of pricing efficiency emphasis is placed on the information content and time domain of prices

selling a lemon under demand uncertainty we consider a seller who has private information about the quality of her good but is uncertain about buyer arrivals assuming that the high quality seller insists on a price we show that the low quality seller s surplus and pricing strategy crucially depend on buyers knowledge about the demand state if they are also uncertain about demand then demand uncertainty increases the low quality seller s expected payoff and her optimal strategy is to lower the price after some time if buyers know the demand state then demand uncertainty does not affect the low quality seller s payoff but she must employ a sophisticated pricing strategy

changing beliefs and systematic rational forecast errors with evidence from foreign exchange this paper addresses a new interpretation to the appearance in the early 1980s of systematic errors in forecasting the dollar exchange rate following a change in the process of a fundamental variable market participants revise their beliefs about the process using bayes rule since the market does not immediately recognize the change forecast errors are on average wrong during a period when the market is rationally learning for conservative parameter values the learning behavior of the dollar exchange rate in the early 1980s appears consistent with about half of the dollar s underprediction implied by the forward market copyright 1989 by american economic association

the sensitivity of an empirical model of married women s hours of work to economic and statistical assumptions this study undertakes a systematic analysis of several theoretic and statistical assumption s used in many empirical models of female labor supply using a singl e data set psid 1975 labor supply data the author is able to replic ate most of the range of estimated income and substitution effects fo und in previous studies in this field he undertakes extensive specif ication tests and finds that most of this range should be rejected du e to statistical and model misspecifications the two most important assumptions appear to be the tobit assumption used to control for sel f selection into the labor force and exogeneity assumptions on the wi fe s wage rate and her labor market experience copyright 1987 by the econometric society

the value of a rational expectations forecast in a risky market a theoretical and empirical approach the central focus of this paper is to develop an easily computable money metric of an agent s willingness to pay for information under risk to extend this concept to the market and to demonstrate its application in a simple twoequation econometric model of the u s fed cattle market the paper draws on previous contributions to the theory of competitive firm under price uncertainty namely rothschild and stiglitz sandmo and more recently pope 1978 1980 and pope chavas and just the latter contributions provide insight into the econometric application of the theory and into the validity of producer surplus measures of firm welfare under risk the conceptual approach presented in this paper facilitates empirical application for a restricted class of utility functions it is shown that the money metric of an agent s willingness to pay for additional information can be computed from the firm s risk averse supply or factor demand function while other studies e g hayami and peterson freebairn decanio have derived welfare estimates of the value of a fore

learning through short run macroeconomic forecasts in a micro to macro model abstract firms in the swedish micro to macro model moses learn about their environment through internal adaptive expectations and through short run external forecasts produced by statistical bureaus the statistical bureaus apply different macroeconomic models that they estimate on data generated by moses firms are learning about their degree of trust in the forecasts of statistical bureaus using bayesian rules in our experiments with learning through external forecasts firms are either forced to use only one source of macroeconomic information or allowed to choose between them with these experiments we can simulate a more or less centrally controlled economy experiments demonstrate that the more of variety of sources of information allowed the better macroeconomic performance

housing price bubbles new supply and within city dynamics abstract although there is broad recognition that cities differ in their tendency to experience house price bubbles most studies assume away any possibility of within city heterogeneity in response to a bubble we develop a model that suggests that this assumption may be appropriate when markets are rising but can be far from reality on the bust side of a bubble during a housing boom new construction and related supply adjustments by developers ensure stable relative prices between low and high quality segments of the housing market on the bust side of a bubble however reduced housing starts allow demand side forces and mortgage default to create pressure for relative prices to diverge across market segments absent a change in technology as markets recover and new construction rebounds relative prices should revert back to pre crash levels evidence based on 2000 2013 single family home sales in phoenix arizona supports this modeling framework additional evidence also suggests that high rates of mortgage default contributed to divergence in relative prices when markets crashed

real options and demographic decisions empirical evidence from east and west germany iyer and velu 2006 have convincingly argued that contemporary analyses of fertility behaviour fail to explain why a woman or a couple will choose to postpone childbirth and in particular to consider the role of uncertainty in this regard they have addressed this lacuna in the literature by using a real options approach to model fertility decisions by relating uncertainty experienced by individuals to the likelihood of childbirth however they did not present empirical evidence since the theory implies the existence of two offsetting effects of uncertainty on fertility decisions a positive insurance effect and a negative option value effect it is not easy to reject the theory on the basis of empirical analysis when one of these effects offsets the other we construct such a test for east and also west germany during that country s reunification which takes advantage of the fact that because of the country s strong welfare system the insurance effect should be dominated by the option value effect thereby suggesting that the net relationship should be negative the results provide rather strong support for the real options link especially for eastern germany

the role of the list price in housing markets theory and an econometric model summary houses are routinely sold at prices below but rarely sold at prices above their list prices list prices appear to be price ceilings that preclude the possibility of sales at higher prices this paper presents a theory of sellers behaviour that explains why there are list prices in housing markets and why list prices are distinct from sellers reservation prices the theory forms the basis of an econometric model that has been estimated using data from the baltimore md area the estimated model predicts sale and reservation prices conditional on list prices the predictions of sale prices are considerably more accurate than those obtained from a standard hedonic price regression the estimated model also explains why sellers may not be willing to reduce their list prices even after their houses have remained unsold for long periods of time houses are routinely sold at prices below and are virtually never sold at prices above their list prices the list price of a house appears to be a price ceiling that precludes the possibility of selling at a higher price this phenomenon is stable over time so it is not caused by market disequilibrium what is the role of list prices in housing markets can list prices be used to predict sellers reservation prices can they be used to make predictions of sale prices that are more accurate than predictions obtained from standard hedonic regressions this paper develops an econometric model of the behaviour of sellers in housing markets that answers these questions the model explains why there are list prices in housing markets and how sellers establish list and reservation prices in addition the model predicts sale and reservation prices conditional on list prices the predictions of sale prices are considerably more accurate than those obtained from a hedonic price regression the model also explains why sellers may not be willing to reduce their list prices even after their houses have remained unsold for long periods of time there have been several previous attempts to model the formation of list prices in housing markets guasch and marshall 1985 and stull 1978 developed search models in which list prices must be set but these models do not admit the possibility that sale prices may bse below list prices chinloy 1980 developed a model in which the seller s reservation price is assumed to be a constant fraction of the list price but chinloy did not explain why list and reservation prices are distinct or why they are proportional to one another these difficulties are not present in the model developed in this paper the theory underlying the model is developed in section 2 the model is presented in section 3 estimation results and some applications are given in section 4 additional applications are given in section 5 and concluding comments are given in section 6

an empirical stationary equilibrium search model of the housing market this article specifies and estimates a computationally tractable stationary equilibrium model of the housing market the model is rich and incorporates many of its unique features buyers and sellers simultaneous search behavior heterogeneity in their motivation to trade transaction costs a trading mechanism with posting prices and bargaining and the availability of an exogenous advertising technology that induces endogenous matching estimation uses maximum likelihood methods and multiple listing services data the estimated model is used to simulate housing market outcomes when a the amount of information displayed on housing listings increases and b real estate agent s commission rates change

forecasting dynamics and convergence to market fundamentals evidence from experimental asset markets abstract subjects trade shares of a fictitious asset in a computerized double auction market and submit one period ahead forecasts of the mean contract price on average the predictions of the rational expectations hypothesis are not supported and forecasts tend to be both biased and inconsistent with the specification of the process which would generate prices in a rational expectations equilibrium nevertheless an empirical analysis of agents forecasting dynamics indicates that learning does occur and that agents forecasts evolve in a direction consistent with a rational expectations equilibrium

female labour force participation and the choice of occupation abstract this paper examines the relationship between occupational choice and participation decisions by women it is motivated by recent policy debate in the u k concerning the supply of teachers where about sixty per cent of teachers are female and the recruitment of women is vital to the maintenance of the labour force in teaching models of earnings determination occupational choice and labour force participation are estimated for a large sample of female graduates the choice of occupation and labour market status is modelled as a joint decision between i teaching and non teaching and ii working and not working estimates from alternative models show that participation decisions are correlated with occupational choice with individuals who choose teaching being more likely to work the choice of occupation is also affected by the earnings differential between teaching and non teaching suggesting that teacher shortages could be alleviated by raising teacher s earnings

semi rational expectations and exchange rate dynamics abstract the rational expectations hypothesis reh asserts that on average the economic agents are accurate in predicting future economic developments the paper demonstrates however that in a world of costly information individual rationality may result in consistent and persistent forecasting biases a distinction is drawn between perfect foresight or efficient forecasting which is consistent with the reh and myopic perfect foresight which is the profit maximizing and thus the rational one from an individualistic point of view even though the latter may result in persistently biased forecasting these concepts are illustrated in a model of exchange rate dynamics which introduces myopic or semi rationality into dornbusch s familiar model

the home selling problem theory and evidence this paper formulates and solves the problem of a homeowner who wants to sell their house for the maximum possible price net of transactions costs including real estate commissions the optimal selling strategy consists of an initial list price with subs equent weekly decisions on how much to adjust the list price until the home is sold or withdrawn from the market the solution also yields a sequence of reservation prices that determine whether the homeowner should accept bids from potential buyers who arrive stochastically over time with an expected arrival rate that is a decreasing function of the list price this model was developed to provide a theoretical explanation for list price dynamics and bargaining behavior observed for a sample of homeowners in england in a new data set introduced by