the structure of financial equilibrium with exogenous yields the case of incomplete markets1 this paper presents an analysis of the structure of competitive equilibrium in a model whose principal feature is incomplete financial markets formulated in the spirit of arrow specifically the overall payoffs or returns from financial instruments are assumed to be fixed or predetermined independently of the operation of the economy and these instruments are assumed to be fewer in number than required to span all potential spot markets for commodities our main result establishes that market incompleteness generates a corresponding degree of allocation indeterminateness suppose there are n 1 spot markets but only 0 m n linearly independent financial instruments so that the deficiency in financial markets is 0 n n m n then subject to some relatively innocuous technical qualifications the set of equilibrium allocations contains a smooth n dimensional submanifold we also indicate how real indeterminacy may increase when returns for example the market price and promised interest on an ordinary bond are treated as variables rather than parameters

sentiments and aggregate demand fluctuations we formalize the keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations when production decisions must be made under imperfect information about demand optimal decisions based on sentiments can generate stochastic self fulfilling rational expectations equilibria in standard economies without persistent informational frictions externalities nonconvexities or strategic complementarities in production the models we consider are deliberately simple but could serve as benchmarks for more complicated equilibrium models with additional features

eductive stability in real business cycle models we reexamine issues of coordination in the standard rbc model is the unique rational expectations equilibrium attainable by rational agents who contemplate the possibility of small deviations from equilibrium surprisingly we nd that coordination cannot be expected even with strong common knowledge assumptions rational agents anticipating small but persistent deviations are led to take actions that eventually contradict the common knowledge assumption this impossibility theorem for eductive learning is not fully overcome when adaptive learning is incorporated into the framework

agricultural export subsidies as a tool of trade strategy before and after the federal agricultural improvement and reform act of 1996 if the main justification for agricultural export subsidies is that they reduce government costs of deficiency payments then the 1996 farm legislation would make u s export subsidies largely unnecessary an additional argument advanced in favor of export subsidies is that their aggressive use by one country will cause competing countries to reduce or discontinue their own subsidies this argument is explored by means of a nash equilibrium in which countries choose both a base subsidy level and a response to competitors and by a consistent conjectures equilibrium little support is found for the argument during the period of the mid 1980s to the mid 1990s export subsidies became an increasingly important part of u s farm policy in fact expenditures on the export enhancement program eep exceeded 1 billion in fy 1993 the enduring popularity of export subsidies has been a source of puzzlement to economists see r paarlberg for example economists argue that governments could provide more assistance to farmers at the same cost to consumers if the money spent on export subsidies were spent instead on direct subsidies to farmers anania bohman and carter present a strong argument along these lines several papers have found circumstances under which export subsidies might be justified abbott paarlberg and sharples show that export subsidies can improve welfare in the exporting country if they are implemented in a discriminatory way reducing prices in countries with relatively elastic demands abbott and kallio show how export subsidies may complement other policies intended to support producers when the exporting country has market power in the world market another possible explanation for the popularity of export subsidies is advanced by alston carter and smith 1993 1995 they show that export subsidies may be justified because they reduce the budgetary costs of the price support program there is an additional argument which is frequently heard in debates about agricultural export subsidies but which has not been fully analyzed by economists supporters of the eep program argue that to discontinue its use would be tantamount to unilateral disarmament in the war for international market share in agricultural trade in other words export subsidies are a useful tool of

devaluation expectations the swedish krona 1982 1991 devaluation expectations for the swedish krona are estimated for the period 1982 1991 with several methods first the simplest test is applied under either only the minimal assumption of no positive minimum profit or the additional assumption of uncovered interest parity then a more precise method suggested by bertola and svensson is used in which expected rates of depreciation within the exchange rate band estimated in several ways are subtracted from interest rate differentials finally estimated devaluations expectations are to some extent explained by a few macrovariables and parliament elections

target zones and exchange rate dynamics this paper develops a simple model of exchange rate behavior under a target zone regime it shows that the expectation that monetary policy will be adjusted to limit exchange rate variation affects exchange rate behavior even when the exchange rate lies inside the zone and is thus not being defended actively somewhat surprisingly the analysis of target zones turns out to have a strong formal similarity to problems in option pricing and investment under uncertainty

who uses interest arbitration the case of british columbia s teachers 1947 1981 several researchers have attempted to identify the circumstances under which parties subject to compulsory interest arbitration will actually push a contract dispute to arbitration in this paper a simple model that incorporates elements of the leading hypotheses is tested using a unique data set spanning 35 years of compulsory conventional arbitration experience among teachers in british columbia the strongest empirical finding is that bargaining units that used arbitration in the previous round of negotiations were at least ten percent more likely than other units to use it in the current round on the other hand variables intended to capture attitudes toward risk changes in the degree of uncertainty associated with arbitral outcomes differing beliefs about likely arbitral outcomes and principal agent problems were found to have little impact on the estimated probability of using arbitration

perfection the infinite horizon and dominance abstract consideration of time and independence brought into focus by the example of perfection in the infinite horizon leads the author to a modified contraction by dominance solution for game theory

using option prices to estimate realignment probabilities in the european monetary system the case of sterling mark abstract this paper describes a procedure for estimating the market s perceived probability distribution of future exchange rates from the prices of risk reversals strangles and other currency options and uses the procedure to estimate the risk neutral ex ante probability of a realignment of the pound sterling the procedure for estimating the realignment probabilities relies on the jump diffusion model of exchange rate behavior and the resulting option pricing formula by fitting this model to market option price data i retrieve the unobserved parameters of the jump diffusion process i then use these parameter estimates to estimate the ex ante probability distribution of exchange rates and thus the realignment probabilities

rational behaviour in extensive form games it is argued that subgame perfect equilibrium behavior is not an inevitable consequence of common belief of rationality among players in noncooperative extensive form games the argument centers around a particular extensive form game with perfect information in the context of this game it is argued that if rationality is not common belief throughout play of the game then it can be perfectly rational to play contrary to subgame perfection even if rationality is common belief at the beginning of the game it is then shown that it is impossible for rationality to be common belief throughout every play of the game

modelling probabilities of devaluations i show why when the realized rates of depreciation within the exchange rate band are regressed on a given information set and conditioned on ex post actual no realignment a la drift adjustment a peso problem is still encountered the reason is that the frequency of realignments in the data need not be the same as the frequency of the even small subjective probabilities that a realignment may take place i suggest an alternative approach to solve the peso problem and provide consistent estimates my estimates of the expected realignment rates are greater than the ones obtained using the drift adjustment method

arbitrage based tests of target zone credibility evidence from erm cross rate options this paper introduces two arbitrage based tests of target zone credibility using a new data source exchange rate mechanism cross rate options using daily option prices from september 1991 to august 1994 the authors assess the credibility of the pound mark and mark lira target zones that collapsed in september 1992 and the ongoing mark french franc target zone these tests are based on restrictions that must apply to all option prices within a credible target zone and are free from specification error and estimation error the authors also identify a minimum intensity of realignment an expression indicating the probability weighted average realignment size copyright 1996 by american economic association

banking panics and policy responses we study how banking panics unfold in av ersion of the diamond and dybvig 1983 model with limited commitment as is well known the banking authority could eliminate the possibility of a run on the banking system by committing to suspend payments to depositors if a run were to start once a run is under way however the banking authority will choose to reschedule rather than suspend payments we construct equilibria in which depositors run on the banking system with positive probability and we show that an equilibrium bank run in this setting is necessarily partial with only some depositors participating we also show that a run naturally occurs in waves with each wave of withdrawals prompting a further policy response from the banking authority the number of waves that occur in equilibrium is stochastic and can be arbitrarily large

endogenous strategic business cycles this paper examines an overlapping generations version of the shapley shubik market game we show existence of equilibria for the simple one commodity model and analyze the dynamics of the equilibrium trajectories generated in the model because of the non linearities generated by strategic interaction of agents in the model we find that complex and chaotic equilibrium dynamics are possible in this model for a much broader range of preferences than those for which grandmont econometrica53 no 5 1995 995 1045 found complicated dynamics in the perfectly competitive version of this model these results then provide an alternative to the usual technology based explanation for the historical fact that business cycles became an important economic phenomenon only with the onset of industrialization journal of economic literatureclassification numbers c72 c73 d51 l16

equilibrium binding agreements abstract we study equilibrium binding agreements the coalition structures that form under such agreements and the efficiency of the outcomes that result we analyze such agreements in a context where the payoff to each player depends on the actions of all other players thus a game in strategic form is a natural starting point unlike the device of a characteristic function explicit attention is paid to the behavior of the complementary set of players when a coalition blocks a proposed agreement a solution concept and its applications are discussed journal of economic literature classification numbers c70 c71

eductive learning and the rationalizability of oligopoly games abstract this paper extends the eductive learning approach in settings with non atomistic agents it shows the connection between the characterization of rationalizable sets by basu 1991 and the seminal result by guesnerie 1992 in the context of cournot oligopoly models

large market games with demand uncertainty abstract we consider a market game with a continuum of consumers where the measure of each type is stochastic nature selects the set of active consumers who make bids and offers on l 1 spot market trading posts existence of type symmetric nash equilibrium is proven when facing price uncertainty best responses are unique and a nash equilibrium to the sell all game is typically not a nash equilibrium to the original game under plausible circumstances consumers strictly prefer to be on one side of the market

auctions with variable supply uniform price versus discriminatory abstract we examine an auction in which the seller determines the supply after observing the bids we compare the uniform price and the discriminatory auction in a setting of supply uncertainty where uncertainty is caused by the interplay of two factors the seller s private information about marginal cost and the seller s incentive to sell the profit maximizing quantity given the received bids in every symmetric mixed strategy equilibrium bidders submit higher bids in the uniform price auction than in the discriminatory auction in the two bidder case this result extends to the set of rationalizable strategies as a consequence we find that the uniform price auction generates a higher expected revenue for the seller and a higher trade volume

market uncertainty correlated and sunspot equilibria in imperfectly competitive economies first version received june 1988 final version accepted november 1990 eds an imperfectly competitive economy is very prone to market uncertainty including uncertainty about the liquidity or thickness of markets we show in particular that there exist stochastic equilibrium outcomes in nonstochastic market games if and only if the endowments are not pareto optimal we also provide a link between extrinsic uncertainty arising in games e g correlated equilibria and extrinsic uncertainty in market economies e g sunspot equilibria a correlated equilibria to the market game is either a sunspot equilibrium or a non sunspot equilibrium to the related securities games but the converse is not true in general

correlated equilibrium as an expression of bayesian rationality if it is common knowledge that the players in a game are bayesian utility maximizers who treat uncertainty about other players actions like any other uncertainty then the outcome is necessarily a correlated equilibrium random strategies appear as an expression of each player s uncertainty about what the others will do not as the result of willful randomization use is made of the common prior assumption according to which differences in probability assessments by different individuals are due to the different information that they have where information may be interpreted broadly to include experience upbringing and genetic makeup copyright 1987 by the econometric society

learning by striking estimates of the teetotaler effect we hypothesize that past strike experience will have a negative or teetotaler effect on a collective bargaining unit s propensity to strike in future negotiations other things being equal we test this using a unique micro level sample comprising four consecutive negotiations by 147 bargaining units in u s manufacturing industries controlling for observable and unobservable differences among bargaining pairs in the propensity to strike our results are consistent with the view that the experience of striking is indeed sobering lagged strike experience variables have a significantly negative effect on the propensity to strike in the current negotiation

private information and sunspots in sequential asset markets we study a model where some agents have private information about risky asset returns and trade to obtain capital gains while others acquire the risky asset and hold it to maturity forming expectations of returns based on market prices we show that under such a structure in addition to fully revealing rational expectations equilibria there exists a continuum of equilibrium prices consistent with rational expectations where the asset prices are subject to sunspot shocks such sunspot shocks can generate persistent uctuations in asset prices that look like a random walk in an e cient market

recent advances in oligopoly theory from a game theory perspective abstract this paper surveys the contribution that recent developments in game theory have made to the understanding of oligopoly theory it is argued that conventional models suffer from the problem that there are a number of solution concepts offered with little guidance as to which should be selected and this is related to the static nature of the models employed one important development in game theory has been the analysis of repeated games and when applied to oligopoly theory this suggests that outcomes may be more cooperative than conventional theory suggests related to this is the requirement that firms employ credible threats to punish cheating from cooperative outcomes and the paper examines the extent to which imperfect information may restrict the scope of firms to employ such punishments one way in which firms may seek to make threats credible is through strategic investments for example in production capacity and the paper explores how competition over price or output is integrated with competition over instruments for strategic investment

rationalizable strategic behavior the notion of equilibrium proposed by nash 19 has come to play a dominant role in economic applications of noncooperative games while analyses of nash equilibria have unquestionably contributed to our understanding of economic behavior it would be unreasonably optimistic to maintain that nash solved the problem of noncooperative strategic choice there is a small literature beginning with ellsberg 6 and a much larger oral tradition which argues that nash behavior is neither a necessary consequence of rationality nor a reasonable empirical proposition in this paper i take the view that although there may be various reasons why an agent might select a nash strategy the notion of an equilibrium has little intrinsic appeal within a strategic context when an agent reaches a decision in ignorance of the strategies adopted by other players rationality consists of making a choice which is justifiable by an internally consistent system of beliefs rather than one which is optimal post hoc this point of view is not original indeed most serious justifications of the nash hypothesis embrace such an approach arguing that agents will expect the game to yield a nash outcome and consequently will choose their equilibrium strategies nevertheless when we think in terms of maximizing utility subject to expectations rather than realizations it becomes clear that the nash hypothesis far from being a consequence of rationality arises from certain restrictions on agents expectations which may or may not be plausible depending upon the game being played we are then quite naturally led to ask are there any restrictions of individuals expectations and hence choices which are required by rationality alone rather than by subjective plausibility this paper is concerned with defining justifying characterizing and refining a criterion for rational strategic choice which i label rationalizability

the term structure of interest rate differentials in a target zone theory and swedish data abstract the term structure of interest rate differentials is derived in a model of a small open economy with a target zone exchange rate regime for given time to maturity the interest rate differential is decreasing in the exchange rate and for given exchange rate the interest rate differential s absolute value and its instantaneous variability are both decreasing in the time to maturity devaluation realignment risks are incorporated and imply upward shifts of the interest rate differentials several implications of the theory are found to be broadly consistent with data on swedish exchange rates and interest differentials for the period 1986 1989

sunspot like effects of random endowments abstract random endowments can affect economic outcomes in two ways directly by affecting resources and indirectly by endogenously affecting expectations this second effect which we call a sunspot like effect allows prices to overreact to movements in fundamentals we prove that sunspot equilibria can be viewed as the limiting case of markets overreacting to small shocks to fundamentals two examples illustrate the theorem and show that sunspot like effects can be present even with significant shocks to fundamentals

testable implications of subjective expected utility theory abstract i show that the predictive content of the hypothesis of subjective expected utility maximization critically depends on what the analyst knows about the details of the problem a particular decision maker faces when the analyst does not know anything about the agent s payoffs or beliefs and can only observe the sequence of actions taken by the decision maker any arbitrary sequence of actions can be implemented as the choice of an agent that solves some intertemporal utility maximization problem under uncertainty

an exploration of the eductive justifications of the rational expectations hypothesis this paper examines justifications of the rational expectations hypothesis that rely on the analysis of the agents mental forecasting educing activity which involves forecasting the forecasts of others etc the corresponding concept of eductive learning stability based on the game theoretical concept of rationalizability is primarily used within the classical muth model conditions for coordination of beliefs are interpreted and discussed they are robust to the introduction of noise more generally eductive stability fits economic intuition on coordination stability increases when the industry product differentiation increases and when decisions are sequential and observable copyright 1992 by american economic association

rationalizable strategic behavior and the problem of perfection this paper explores the fundamental problem of what can be inferred about the outcome of a noncooperative game from the rationality of the players and from the information they possess the answer is summarized in a solution concept called rationalizability strategy profiles that are rationalizable are not always nash equilibria conversely the information in an extensive form game often allows certain unreasonable nash equilibria to be excluded from the set of rationalizable profiles a stronger form of rationalizability is appropriate if players are known to be not merely rational but also cautious what constitutes rational behavior in a noncooperative strategic situation this paper explores the issue in the context of a wide class of finite noncooperative games in extensive form the traditional answer relies heavily upon the idea of nash equilibrium nash 17 the position developed here however is that as a criterion for judging a profile of strategies to be reasonable choices for players in a game the nash equilibrium property is neither necessary nor sufficient some nash equilibria are intuitively unreasonable and not all reasonable strategy profiles are nash equilibria the fact that a nash equilibrium can be intuitively unattractive is well known the equilibrium may be imperfect introduced into the literature by selten 20 the idea of imperfect equilibria has prompted game theorists to search for a narrower definition of equilibrium while this research some of which will be discussed here has been extremely instructive it remains inconclusive theorists often agree about what should happen in particular games but to capture this intuition in a general solution concept has proved to be very difficult if this paper is successful it should make some progress in that direction the other side of the coin has received less scrutiny can all non nash profiles really be excluded on logical grounds i believe not the standard justifications for considering only nash profiles are circular in nature or make gratuitous assumptions about players decision criteria or beliefs the following discussion of these points is extremely brief due to space constraints more detailed arguments may be found in pearce 18

linear inequality methods to enforce partnerships under uncertainty an overview we review different generic conditions on stochastic outcome functions to enforce either efficient or nearly efficient partnerships their logical relationship is explored two kinds of conditions are considered however the property for an action profile to be compatible plays a crucial role in both kinds also two kinds of enforcement mechanisms are considered enforcement through utility transfers and enforcement through repetition

estimating the narcotic effect of public sector impasse procedures this paper first describes in a relatively nontechnical fashion several econometric techniques that the authors believe should be useful to industrial relations researchers those techniques are then applied to an analysis of whether public sector impasse procedures create a narcotic effect that is a tendency for the bargaining parties once they use the procedures to become increasingly reliant on them in future negotiations the authors reanalyze data from thomas kochan and jean baderschneider s study of the impasse experience of police and firefighters under new york state s taylor law during the 1968 76 period and find that while a narcotic effect did exist as kochan and baderschneider argued that relationship lasted only during the early years of the period and was actually reversed in later years the authors conclude by explaining how such a pattern of results could occur tracing the implications of their findings for public policy and suggesting other research questions that could be anal

the long haul effects of interest arbitration the case of new york state s taylor law the authors examine debates about the effects of mandatory interest arbitration on police and firefighters in new york state under the taylor law from 1974 to 2007 comparing experience with interest arbitration in the first three years after the law was adopted with experiences from 1995 to 2007 the authors find that no strikes occurred under arbitration and that rates of dependence on arbitration declined considerably moreover the effectiveness of mediation prior to and during arbitration remained high the tripartite arbitration structure continued to foster discussion of options for resolution among arbitration panel members and wage increases awarded under arbitration matched those negotiated voluntarily by the parties econometric estimates of the effects of interest arbitration on wage changes in a national sample suggest wage increases differed little in states with arbitration from those without it the authors therefore propose a role for interest arbitration in national labor policy

target zones and realignments recent contributions emphasize that the presence of exchange rate target zones has important effects on the within band behavior of exchange rates when agents are forward looking the authors find that the implications of available models are inconsistent with european exchange rate data and they suggest that the frequent realignments occurring in the period they consider may be responsible for this they construct a model in which the likelihood of a realignment in the near future increases as the exchange rate approaches the limits of its fluctuation band and show that its implications are broadly consistent with the evidence copyright 1992 by american economic association

equilibrium without independence abstract because players whose preferences violate the von neumann morgenstern independence axiom may be unwilling to randomize as mixed strategy nash equilibrium would require a nash equilibrium may not exist without independence this paper generalizes nash s definition of equilibrium retaining its rational expectations spirit but relaxing its requirement that a player must bear as much uncertainty about his own strategy choice as other players do the resulting notion equilibrium in beliefs is equivalent to nash equilibrium when independence is satisfied but exists without independence this makes it possible to study the robustness of equilibrium comparative statics results to violations of independence

bargaining in stationary networks we study an infinite horizon game in which pairs of players con nected in a network are randomly matched to bargain players who reach agreement are replaced by new players at the same positions in the network we show that all equilibria are payoff equivalent the payoffs and the set of agreement links converge as players become patient several new concepts mutually estranged sets partners and shortage ratios provide insights into the relative strengths of the positions in the network we develop a procedure to deter mine the limit equilibrium payoffs for all players characterizations of equitable and nondiscriminatory networks are also obtained jel c78 d85 competitive equilibrium theory assumes large and anonymous markets in which every buyer can trade with every seller underlying these assumptions are standard goods and services that may be traded at low transaction costs by agents who are not in specific relationships with one another however in many markets goods and services are heterogeneous e g cars apartments or need to be tailored to particular needs e g manufacturing inputs technical support furthermore trad ing opportunities may depend on transportation costs social relationships infor mation advertising trust technological compatibility joint business opportunities free trade agreements etc in such cases it is natural to model the market using a network where only pairs of connected agents may engage in exchange new theories are needed to explore the influence of the network structure on market outcomes many questions arise how does an agent s position in the net work determine his bargaining power and the local prices he faces who trades with whom and on what terms when are prices uniform in the network one possible conjecture is that an agent s bargaining power is determined by his relative number of connections in the network however this simple theory is implausible consider the network of four sellers located at the top nodes and nine buyers located at the bottom nodes depicted in figure 1 assume that each seller supplies one unit of a homogeneous indivisible good each buyer demands one unit of the good and all buyers have identical values for the good the buyer located in the middle has the largest number of links in the network as he is connected to each

price level volatility a simple model of money taxes and sunspots abstract we investigate sunspot equilibria in a static one commodity model with taxes and transfers denominated in money units volatility in this economy is purely monetary since the only uncertainty is about the price level we construct simple robust examples of sunspot equilibria that are not mere randomizations over certainty equilibria we also identify the source of these sses equilibrium in the securities market is determined as if there were no restricted consumers and the unrestricted consumers face intrinsic uncertainty perfect securities markets eliminate allocation uncertainty but they exacerbate price level volatility journal of economic literature classification numbers d50 d52 d84 e31 e62

is there a peso problem evidence from the dollar pound exchange rate 1976 1987 one of the most puzzling aspects of the floating exchange rate regime since 1973 has been the apparent irrationality embedded in investors exchange rate expectations this paper investigates whether exchange rate forecasts although biased are still rational the idea is that investors can be rational and yet make repeated mistakes if the true model of the exchange rate is evolving over time the author s results support the hypothesis that the exchange rate has followed a switching regime process moreover the switching regime model estimated can explain about 75 percent of the bias implied by the forward market and the survey data copyright 1993 by american economic association

a jump diffusion model for the european monetary system abstract we propose a general continuous time bivariate jump diffusion representation for the exchange rates of european currencies our model captures key features of the exchange rate mechanism fluctuation within bilateral limits is modeled by appropriate diffusion dynamics while discontinuous variation in the level of the fluctuation band is posited to have a jump structure under specific assumptions the probability distribution of the exchange rate process is derived analytically we also perform an empirical investigation of these exchange rates comparing the fit of alternative models we find some evidence of mean reversion inside the bands for these exchange rates jel f33 c51

on biases in the measurement of foreign exchange risk premiums abstract the hypothesis that the forward rate is an unbiased predictor of the future spot rate has been consistently rejected in recent empirical studies this paper examines several sources of measurement error and misspecification that might induce biases in such studies although previous inferences are shown to be robust to a failure to construct true returns and to omitted variable bias arising from conditional heteroskedasticity in spot rates we show that the parameters were not stable over the 1975 89 sample period estimation that allows for endogenous regime shifts in the parameters demonstrates that deviations from unbiasedness were more severe in the 1980s jel f31

stochastic devaluation risk and the empirical fit of target zone models in the model of this paper an exchange rate fluctuates between given boundaries for random lengths of time and jumps discretely when devaluation occur we provide explicit solutions for the stochastic processes followed by the exchange rate and by the expected rate of depreciation when the likelihood and the size of devaluations vary stochastically over time the model produces realistic patterns of covariation between exchange rates and interest rate differentials and provides interesting interpretations of available empirical evidence we also specify how to infer devaluation risk from target zone data

real indeterminacy with financial assets abstract it is shown that in a two period general equilibrium securities model where assets pay in money the generic dimension of the set of equilibrium allocations in the incomplete market situation is s 1 where s is the number of assets hence the degree or real indeterminacy is independent of the number of assets this result requires beyond fewer assets than states that the number of traders be larger than the number of securities and that the asset return matrix be in general position the generic dimension for arbitrary returns matrix is also obtained it is argued in addition that the presence of real or mixed assets does not by itself lower the degree of indeterminacy

third party intervention and the preservation of bargaining relationships this article uses longitudinal bargaining contract data to examine whether third party dispute resolution procedures improve the health of bargaining relationships and contribute to their preservat

estimating the credibility of an exchange rate target zone abstract recent breakthroughs in the theory of exchange rate target zones have not been followed by similar contributions on the empirical side the drift adjustment method of evaluating the credibility of a target zone has become common practice however the estimates of the expected rate of depreciation inside the band do not model knowledge of the band in the agents information set in this paper a rational expectations limited dependent variable method to estimate the expected rate of depreciation is used to remedy this weakness in the case of the franc mark target zone with daily data covering a 4 year period we show that expected rates of devaluation of the order of 2 5 were still present in the early 1990s their reappearance in the autumn of 1992 may thus not be surprising

reinterpreting arbitration s narcotic effect an experimental study of learning in repeated bargaining field evidence suggests that arbitration increases negotiation dispute rates we study repeated bargaining in a laboratory to understand the reasons why our results represent a reinterpretation of an explanation known as the narcotic effect the standard interpretation assumes that the probability of dispute without arbitration is constant across negotiations but field evidence suggests that experienced bargainers have fewer disputes to properly assess arbitration s impact we compare bargainer learning with and without arbitration under otherwise comparable laboratory conditions and develop a model to measure learning we find strong evidence that learning occurs in both cases but is slower with arbitration journal of economic literature classification numbers c78 c92 d77 j52 q 1998 academic press

the power of sunspots an experimental analysis abstract in an experiment using a coordination game with extrinsic random signals sunspots we systematically vary the stochastic process generating these signals and measure how signals affect behavior we find that sunspot equilibria emerge naturally with salient public signals however highly correlated private signals can also lead to sunspot driven behavior even when this is not an equilibrium private signals reduce the power of public signals as sunspot variables the higher the correlation of extrinsic signals and the more easily they can be aggregated the more powerful these signals are in distracting actions from the action that minimizes strategic uncertainty

sunspots in the laboratory we show that extrinsic or nonfundamental uncertainty influences markets in a controlled environment this work provides the first direct evidence of sunspot equilibria these equilibria require a common understanding of the semantics of the sunspot variable and they appear to be sensitive to the flow of information sunspots always occur in a closed book call market but they happen only occasionally in a double auction where inframarginal bids and offers are observable

general equilibrium concepts under imperfect competition a cournotian approach in a pure exchange economy we propose a general equilibrium concept under imperfect competition the cournotian monopolistic competition equilibrium and compare it to the cournot walras and the monopolistic competition concepts the advantage of the proposed concept is to require less computational ability from the agents the comparison is made first through a simple example then through a mon abstract concept the p equilibrium based on a general notion of price coordination c 1997 academic press

de stabilizing speculation on futures markets an alternative view point abstract this paper offers a new interpretation for possible destabilizing effects of opening futures markets in our model adapted from stein 1987 speculation on futures markets reduces the likelihood of occurrence of a rational expectations equilibrium although the equilibrium price is less volatile after the futures market is opened which is usually viewed as a stabilizing effect traders may find it more difficult or even impossible to coordinate their expectations in order to implement this equilibrium

devaluation risk in target zones evidence from the nordic countries in this paper the authors estimate devaluation risk in denmark finland norway and sweden the target exchange ra te is modeled as a censored variable a shadow peg that is only observed when the equilibrium floating rate is too far from the prevailing peg using a two step procedure the authors are able to calculate time series of the probability and expected size of devaluations th e probability as well as the size of devaluations seem to be systematically related to a relation between the money stock industrial production foreign exchange reserves and the prevailing central parity copyright 1993 by royal economic society

identification and estimation of dynamic games when players beliefs are not in equilibrium this article deals with the identification and estimation of dynamic games when players beliefs about other players actions are biased that is beliefs do not represent the probability distribution of the actual behaviour of other players conditional on the information available first we show that an exclusion restriction typically used to identify empirical games provides testable non parametric restrictions of the null hypothesis of equilibrium beliefs in dynamic games with either finite or infinite horizon we use this result to construct a simple likelihood ratio test of equilibrium beliefs second we prove that this exclusion restriction together with consistent estimates of beliefs at two points in the support of the variable involved in the exclusion restriction is sufficient for non parametric point identification of players belief functions as well as useful functions of payoffs third we propose a simple two step estimation method we illustrate our model and methods using both monte carlo experiments and an empirical application of a dynamic game of store location by retail chains the key conditions for the identification of beliefs and payoffs in our application are the following 1 the previous year s network of stores of the competitor does not have a direct effect on the profit of a firm but the firm s own network of stores at previous year does affect its profit because the existence of sunk entry costs and economies of density in these costs and 2 firms beliefs are unbiased in those markets that are close in a geographic sense to the opponent s network of stores though beliefs are unrestricted and potentially biased for unexplored markets which are farther away from the competitors network our estimates show significant evidence of biased beliefs furthermore imposing the restriction of unbiased beliefs generates a substantial attenuation bias in the estimate of competition effects

cournot and the oligopoly problem cournot s recherches sw les principes mathpmatiques de la thiorie des richesses 1838 contribution to economic theory ranges from the formulation of the concept of demand function to the analysis of price determination in different market structures from monopoly to perfect competition he is credited for being the pioneer in the use of mathematics in economic analysis nevertheless cournot is most known for his theory of oligopoly cournot claimed that prices would also be determined under oligopolistic rivalry he envisioned firms the celebrated mineral water producers competing independently deciding about their production levels and bringing to the market the output where a price emerges from the interaction of supply and demand an equilibrium is reached when the output of any firm is a best response to the other firms outputs that is when each firm chooses an output level that maximizes profits given the outputs chosen by the rivals the equilibrium involves a price above the marginal cost of production cournot thought furthermore that this equilibrium would be stable in the sense that a departure from it would be self correcting through a series of reactions of the firms the disequilibrium dynamics would be governed by the best response functions of the firms that is by the functions that give the optimal output of a firm in terms of the outputs of the rivals cournot also evoked the question of why is it that firms do not come to an understanding and agree on sharing the market at the monopoly price the answer is that from the point of view of a firm if the rivals follow the agreement it is in the interest of the firm to depart from it since this way it can increase its profits in other words there is an incentive to cheat cournot thought that monopoly or cartel type agreements could only be maintained by means of a formal engagement p 83 our author also considered competition of

stability with one sided incomplete information two notions of stability ex ante stability and bayesian stability are investigated in a matching model with non transferrable utility interdependent preferences and one sided incomplete information ex ante stable matching outcomes are unblocked for every belief on the blocking partner s type while bayesian stable matching outcomes are unblocked with respect to prior beliefs ex ante stability is a minimal requirement bayesian stability is a more selective desideratum with sound efficiency properties

retrading in market games when agents are not price takers they typically cannot obtain an efficient real location of resources in one round of trade this paper presents a non cooperative model of imperfect competition where agents can retrade allocations consistent with edgeworth s idea of recontracting we show a there are pareto optimal allocations including competitive equilibrium allocations that can be approximated arbitrarily closely when trade is myopic i e when agents play a static nash equilibrium at every round of retrading b any converging sequence of allocations generated by myopic retrading can be supported along some retrade proof subgame perfect equilibrium path when traders anticipate future rounds of trading

interest rates in the nordic countries evidence based on devaluation expectations over the period 1979 92 investments in danish and norwegian kroner in the euromarket have had an annual excess return of about 2 and 1 1 per cent compared to investments in the euromarket in foreign currencies assuming risk neutrality the subjective probability of a devaluation within the next month is derived from the excess returns on the euromarket these derived probabilities are found to be inconsistent with the actual number of devaluations that have taken place over this period so that the probability of devaluation has been significantly overrated for denmark and norway

stationarity rationalizability and bargaining strategies for the seller and the buyer which are weakly stationary we demonstrate that any initial offer from the seller induced by a strategy rationalized by a weakly stationary acceptance rule for the buyer must entail the coase property our result does not presume the selection of a particular equilibrium and follows directly from the weak stationarity assumption of the buyer s acceptance rule and the rational behaviour of the players

firm dynamics and markup variations implications for sunspot equilibria and endogenous economic fluctuations this paper analyzes how the interaction between firms entry and exit decisions and variations in competition gives rise to self fulfilling expectation driven fluctuations in aggregate economic activity and in measured total factor productivity tfp the analysis is based on a dynamic general equilibrium model in which net business formation is endogenously procyclical and leads to endogenous countercyclical variations in markups this interaction leads to indeterminacy in which economic fluctuations occur as a result of self fulfilling shifts in the beliefs of rational forward looking agents when calibrated with empirically plausible parameter values and driven solely by self fulfilling shocks to expectations the model can quantitatively account for the main empirical regularities characterizing postwar u s business cycles and for 65 of the fluctuations in measured tfp

sunspots correlation and competition correlated equilibria in strategic market games played simultaneously by overlapping generations of players correspond to sunspot equilibria in the associated competitive economy we provide a necessary and sufficient condition for existence of effective correlation an increase in the number of agents in a given economy may allow for effective correlation

a proof of the existence of speculative equilibria abstract the existence of speculative equilibria is proven in a simple overlapping generations infinite horizon economy in equilibrium all agents bid for assets according to increasing functions of private information which is independent of the fundamental value dividend stream of the asset this is a unique best response to the strategies of the other agents which implies that speculative information is valuable for certain stationary settings the existence of speculative equilibria in which all agents use the same bidding function is demonstrated journal of economic literature classification numbers d84 g12 g14

realignment expectations and the us dollar 1890 1897 was there a peso problem we investigate dollar sterling exchange rate expectations during the period 1890 1908 we show that the dollar faced a peso problem in that for much of the period financial markets expected it to depreciate against sterling but this never in fact happened i e expectations were persistently biased drawing on the economic history of the period we identify 11 events which probably gave rise to realignment expectations once the dollar s adherence to the gold standard was settled as a political matter in the 1896 presidential election expectations of dollar realignment abruptly subsided and united states interest rates fell relative to british rates

local coordination and market equilibria we reformulate the local stability analysis of market equilibria in a competitive market as a local coordination problem in a market game where the map associating market prices to best responses of all traders is common knowledge and well defined both in and out of equilibrium initial expectations over market variables differ from their equilibrium values and are not common knowledge this results in a coordination problem as traders use the structure of the market game to converge back to equilibrium we analyse a simultaneous move and a sequential move version of the market game and explore the link with local rationalizability

correlated equilibria and sunspots we examine when sunspots uncertainty that has no influence on endowments preferences or technology can affect equilibrium in a simple two period two commodity two class economy we find that such an effect is possibly only if the signals random variables that different agents observe are imperfectly correlated neither perfectly correlated nor independent and at least one commodity is a giffen good for two special cases we characterize the set of equilibria due to sunspots we conclude by showing the intimate connection between the sunspot equilibria of our finite horizon model and those of the overlapping generations literature

the revelation of information and self fulfilling beliefs abstract at a rational expectations equilibrium ree individuals are assumed to know the map from states to prices this hypothesis has two components that agents agree consensus and that they have point expectations degeneracy we consider economies where agents beliefs are described by a joint distribution on states and prices and these beliefs are fulfilled at equilibrium beliefs are self fulfilling if every price in the support of the distribution is an equilibrium price the corresponding equilibria are beliefs equilibria be the further restriction that agents have the same beliefs results in common beliefs equilibria cbe we study the relationship between be cbe and ree thus isolating the role of consensus and of degeneracy in achieving rational expectations journal of economic literatureclassification numbers d51 d82

equilibrium prices when the sunspot variable is continuous we analyze sunspot equilibrium prices in nonconvex economies with perfect markets and a continuous sunspot variable our primary result is that every sunspot equilibrium allocation can be supported by prices that when adjusted for probabilities are constant across states this result extends to the case of a finite number of equally probable states under weak nonsatiation conditions but does not extend to general discrete state spaces we use our primary result to establish the equivalence of the set of sunspot equilibrium allocations based on a continuous sunspot variable and the set of lottery equilibrium allocations

liquid markets and competition abstract a market is liquid if no individual s actions have a big effect on the prices of goods traded in that market perfectly competitive markets are therefore perfectly liquid it is well known that market liquidity can be achieved by increasing the number of traders so that individual trades are small compared to total trades we show that even when there are only few traders market liquidity can be achieved through large short sales in which net trades are small relative to gross trades in particular for a natural variant of the market game which permits unlimited short sales we show that there is always a nash equilibrium allocation arbitrarily close to a competitive equilibrium allocation of course not all ne are near competitive only the large short sales ne are nearly liquid and hence close to ce