Waterloo economics series | 2012

#12-001 -- Jean Guillaume Forand

Competing through information provision (PDF)

Abstract

This paper studies the symmetric equilibria of a two-buyer, two-seller model of directed search in which sellers commit to information provision. More informed buyers have better differentiated private valuations and extract higher rents from trade. When sellers cannot commit to sale mechanisms, information provision is higher under competition than under monopoly, yet partial information is provided when sellers are price-setters. In contrast, when sellers commit to both information provision and sale mechanisms, I identify simple conditions under which sellers post auctions and provide full information in every equilibrium, ensuring that all equilibrium outcomes are constrained efficient. Sellers capture the efficiency gains from increased information and compete only over non-distortionary rents offered to buyers.

Journal of Economic Literature (JEL) classification

C72, D43, D44, D82

Keywords

Information structures, directed search, competing mechanism designers

#12-002 -- Jean Guillaume Forand and Vikram Maheshri (Department of economics, University of Houston)

(De)Regulation and market thickness (PDF)

Abstract

Regulation is a set of constraints imposed on transactions between buyers and sellers. We introduce a dynamic frictional matching model with horizontal differentiation and nontransferable utility in which a regulator determines permissible transactions. We show the existence and uniqueness of a market equilibrium for any level of regulation and characterize the regulator’s optimal choice of regulatory environment. We argue that in ‘thin’, markets, regulation can correct market failure arising from mismatch between buyers and sellers. However, in ‘thick’ markets, deregulation is optimal, as a regulator can rely on market participants’ equilibrium behavior instead of explicit constraints on economic activities.

JEL classification

D04, L51, C73, C78

Keywords

Optimal regulation, market thickness, frictional matching

#12-003 -- Pierre Chaussé and Dinghai Xu

GMM estimation of a stochastic volatility model with realized volatility: a Monte Carlo study (PDF)

Abstract

This paper investigates alternative generalized method of moments (GMM) estimation procedures of a stochastic volatility model with realized volatility measures. The extended model can accommodate a more general correlation structure. General closed form moment conditions are derived to examine the model properties and to evaluate the performance of various GMM estimation procedures under Monte Carlo environment, including standard GMM, principal component GMM, robust GMM and regularized GMM. An application to five company stocks and one stock index is also provided for an empirical
demonstration.

JEL classification

G17, G32, C58, C01

Keywords

Generalized method of moments; principal component; robust GMM;
regularized GMM; heteroscedasticity and autocorrelation consistent; Monte Carlo simulation; stochastic volatility model; realized volatility measure.

#12-004 -- Dinghai Xu

Continuous empirical characteristic function estimation of Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) models (PDF)

Abstract

This paper develops a simple alternative estimation method for the GARCH models based on the empirical characteristic function. A set of Monte Carlo experiments is carried out to assess the performance of the proposed estimator. The results reveal that the proposed estimator has good finite sample properties and is comparable to the conventional maximum likelihood estimator. The method is applied to the foreign exchange data for empirical illustration.

JEL Classification

C01, C58

Keywords

Empirical characteristic function, GARCH, maximum likelihood estimator

#12-005 -- Philip A. Curry and Matthew Doyle

Social welfare and the benefits to crime (PDF)

Abstract

There exists a large literature on the optimal deterrence of crime. Within the literature, however, there exists a controversy over what the appropriate criterion to determine optimality should be. While the most popular method is that of maximization of a utilitarian welfare function, another criterion sometimes used is that of cost minimization. The controversy stems from the question of whether the benefits to crime enjoyed by criminals ought to be included in the welfare analysis. This paper argues that the controversy is an artifact of the fact that the standard model restricts a potential criminal's choice to one of committing a crime or doing nothing. We show that when potential criminals are given the additional choice of achieving their ends through voluntary methods that maximizing the sum of utilities is in fact equivalent to minimizing the costs of crime. The model developed also provides explanations for sanctions that increase in one's criminal history and why necessity may be a partial defense.

JEL classification

K42, D6, H0

Keywords

Economics of crime, social welfare

#12-006 -- Phillip A. Curry and John E. Roemer (Departments of political science and economics, Yale University)

Evolutionary stability of kantian optimization (PDF)

Abstract

In Nash equilibrium, agents are autarchic in their optimization protocol, whereas in Kantian equilibrium, they optimize in an interdependent way. Typically, researchers into the evolution of homo economicus treat preferences as being determined by selective adaptation, but hold fixed the optimization protocol as autarchic. Here, we ask whether natural selection might choose the optimizing protocol to be either autarchic or interdependent. That is, will Kantian players, for whom the stable concept is Kantian equilibrium drive Nash players (for whom the stable concept is Nash equilibrium) to extinction, or otherwise? The answer depends upon whether players can signal their type to others.

JEL classification

C73, C62, D64

Keywords

Kantian equilibrium, Nash equilibrium, evolutionary stable strategy, cooperation

#12-007 -- Jean Guillaume Forand

Usless prevention vs. costly remediation (PDF)

Abstract

I model the dynamic agency relationship underlying prevention. In each period, a principal can transfer resources to an agent that has private information about a problem, which the agent can direct to solving the problem or divert into rents. Problems are persistent and rectifiable: they randomly generate observable disasters until enough resources have been committed to solving them. I characterise the principal's equilibrium trade-off between (a) preventing disasters while squandering transfers in informational rents to agents facing trivial problems and (b) limiting transfers and remediating costly disasters that eliminate agents informational advantage and prove the need for action.

JEL classification

D72, H10, C73

Keywords

Agency, prevention, dynamic moral hazard, adverse selection

#12-008 -- Jingye Shi (Southwestern University of Finance and Economics, China) and Mikal Skuterud

Gone fishing! Reported sickness absenteeism and the weather (PDF)

Abstract

A fundamental challenge in informing employer-employee agency problems is measuring employee shirking activity. We identify the propensity of employees to misreport health in order to exploit favorable weather by linking Canadian weather data and survey data on short-term spells of sickness absenteeism among indoor workers during the non-winter months. The results point to a clear tendency for reported sickness absenteeism to rise with weather quality. Comparing across workers suggests larger marginal weather effects where shirking costs are higher, which we show is consistent with employees' marginal utility of outdoor leisure increasing in the interaction of their health and weather quality.

JEL classification

D82, I10, J22

Keywords

Absenteeism, weather, employee shirking