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No. 2008-05
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- Labour pooling as a source of agglomeration: An empirical investigation
- by Henry G. Overman and Diego Puga
We provide empirical evidence on the role of labour market pooling in determining the spatial
concentration of UK manufacturing establishments. This role arises because large concentrations
of employment iron out idiosyncratic shocks and improve establishments' ability to adapt their
employment to good and bad times. We measure the likely importance of labour pooling by
calculating the fluctuations in employment of individual establishments relative to their
sector and averaging by sector. Our results show that sectors whose establishments experience
more idiosyncratic volatility are more spatially concentrated, even after controlling for a
range of other industry characteristics that include a novel measure of the importance of
localized intermediate suppliers.
- Created: 2008/06/23
- JEL-Codes: R30; R132
- Keywords: labour market pooling; spatial concentration
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No. 2008-04
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- Some Reflections on the Economics of Prosecutors: Mandatory v Selective Prosecution
- by Nuno Garoupa
Mandatory prosecution is inefficient according to legal economists. We argue that when prosecutors are fairly insulated from their performance or are highly risk averse mandatory prosecution is better than selective prosecution. This result has important implications for comparative law since mandatory prosecution generally prevails in civil law jurisdictions whereas selective prosecution is typical of common law jurisdictions.
- Created: 2008/02/07
- JEL-Codes: K4
- Keywords: prosecutors; mandatory prosecution; selective prosecution; civil law; common law
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No. 2008-03
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- The Scope of Criminal Law and Criminal Sanctions: an Economic View and Policy Implications
- by Roger Bowles, Michael Faure and Nuno Garoupa
This paper considers why some harm-generating activities are controlled by criminal law and criminal sanctions while others are subject to some other mechanism such as civil law, administrative law, regulation or the tax system. It looks at the question from the perspective of the law and economics approach. We seek to identify the comparative benefits of using the criminal law relative to other enforcement mechanisms and – more broadly – why certain specific behaviours are criminalized. The paper argues that an economic approach emphasizing the relative merits of alternative legal instruments for bringing about harm reduction can provide an explanation for a number of recent legal developments. It argues also that the willingness of legislators to combine the use of sanctions traditionally used in one area of the law with sanctions from other areas is more readily explicable in economic terms than in other terms.
- Created: 2008/02/07
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No. 2008-02
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- Why Plea-Bargaining Fails to Achieve Results in So Many Criminal Justice Systems: A New Framework for Assessment
- by Nuno Garoupa and Frank H Stephen
The economics of plea-bargaining is largely over-optimistic and contrasts with legal scholarship on the topic. We have shown that part of the reason is that it still relies heavily on the 'efficient prosecutor' model and only recently has started looking at the possible advantages of judicial scrutiny. As a consequence, the economics of plea-bargaining has largely failed to influence the debate in Europe and around the world. Further, it was unable to predict the relative failure of Italy (and possibly France), although there is an ex post rationalization (bargaining as an inadequate solution to delays in trial rather than as a device to generate prosecutorial efficient allocation of resources). This paper proposes a new approach based on viewing the contract, which is at the heart of the plea-bargain, as being located in a wider nexus of relationships involving parties who are not directly (or effectively) represented at the bargaining table. By looking in detail to the contract between defendant and his lawyer, the role of the prosecutor, and third party effects, we have provided a richer model that is more skeptical of the efficiency of plea-bargaining. We also point out that a successful transplant of plea-bargaining from the United States to civil law jurisdictions such as France and Italy will very much depend on a reform of criminal procedure that addresses the agency costs we have identified.
- Created: 2008/02/07
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No. 2008-01
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- Information Transmission and Core Convergence in Quasilinear Economies
- by Yusuke Kamishiro and Roberto Serrano
We study core convergence in interim quasilinear economies with asymmetric information, concentrating on core notions in which information is transmitted endogenously within coalitions and the incentive constraints are relevant. Specifically, we shall focus on the credible core and randomized mediated core concepts. We consider independent replicas of the basic economy: independent copies of the economy in which each individual's utility only depends on the information of the individuals who belong to the same copy. We provide an example in which core convergence does not obtain for the Dutta-Vohra credible core and for Myerson's randomized mediated core. On the other hand, we establish a positive convergence result for a refinement of Myerson's core for which information disseminates across coalitions within a given random blocking mechanism. Under some conditions, this core converges to the set of incentive compatible ex-post Walrasian allocations.
- Created: 2008/02/06
- JEL-Codes: C71; C72; D51; D82
- Keywords: core convergence; information transmission; coalitional voting mechanisms; mediation; rational expectations equilibrium
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No. 2007-22
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- The use of derivatives in the spanish mutual fund industry
- by José M. Marín and Thomas A. Rangel
We study the use of derivatives in the Spanish mutual fund industry. The picture that emerges from our analysis is rather negative. In general, the use of derivatives does not improve the performance of the funds. In only one out of eight categories we find some (very weak and not robust) evidence of superior performance. In most of the cases users significantly underperform non users. Furthermore, users do not seem to exhibit superior timing or selectivity skills either, but rather the contrary. This bad performance is only partially explained by the larger fees funds using derivatives charge. Moreover, we do not find evidence of derivatives being used for hedging purposes. We do find evidence of derivatives being used for speculation. But users in only one category exhibit skills as speculators. Finally, we find evidence of derivatives being used to manage the funds' cash inflows and outflows more efficiently.
- Created: 2007/10/28
- JEL-Codes: G11;G2
- Keywords: mutual funds; derivative use; risk management
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No. 2007-21
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- Firms vs. insiders as traders of last resort
- by José M. Marín and Antoni Sureda-Gomila
We explore the role of corporate insiders vs. firms as traders of last resort. We develop a simple model of insider trading in which insiders provide price support, as well as liquidity, in security markets. Consistent with the model predictions we find that in the US markets insiders’ trading activities have a clear impact on return distributions. Furthermore, we provide empirical evidence on insiders transactions and firm transactions affecting returns in a different manner. In particular, while insiders' transactions (both purchases and sales) have a strong impact on skewness in the short run and to a lesser extent in short run volatility, company repurchases only have a clear impact on volatility, both in the short and the long run. We provide explanations for this asymmetry.
- Created: 2007/10/28
- JEL-Codes: G11; G12; G14; G18
- Keywords: insider trading; liquidity; short-horizon variance; autocorrelation; skewness
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No. 2007-20
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- The dog that did not bark:
Insider trading and crashes
- by José M. Marín and Jacques Olivier
This paper documents that at the individual stock level insiders sales peak many months before a large drop in the stock price, while insiders purchases peak only the month before a large jump. We provide a theoretical explanation for this phenomenon based on trading constraints and asymmetric information. A key feature of our theory is that rational uninformed investors may react more strongly to the absence of insider sales than to their presence (the “dog that did not bark” effect). We test our hypothesis against competing stories such as patterns of insider trading driven by earnings announcement dates, or insiders timing their trades to evade prosecution.
- Created: 2007/10/28
- JEL-Codes: D82; G11; G12; G14; G28
- Keywords: insider trading; rational expectations equilibrium; trading constraints; volatility; crashes; short- sales constraint
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No. 2007-19
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- Cross-border M&As and the changing economic geography of Europe
- by Andrés Rodríguez-Pose and Hans-Martin Zademach
This paper investigates the patterns of corporate mergers and acquisitions (M&As) involving firms located in the EU25 as well as in the four EFTA countries between 1998 and 2003. It first uncovers the 'cross-border balance' of M&As across European states, before identifying, through quantitative multiple regression analysis and insights from qualitative, interview-based research, the extent to which the spatial perspective sheds light onto the factors that may explain the detected levels and patterns of corporate takeovers across Europe. The results indicate that the traditional motives of access to new and core markets, the effects of geographical proximity, and the internalisation of 'localised capabilities' (proxied by a skilled and innovative labour pool) represent the key drivers of European M&As. Institutional factors, such as European integration, assessments of country risk, or language barriers, as well as structural factors (e.g. unemployment or education) appear to be - at least at the intra-European scale - less influential.
- Created: 2007/09/24
- Keywords: mergers & acquisitions; theory of the firm; spatial proximity; agglomeration economies; localised capabilities; economic integration; Europe
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No. 2007-18
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- Mapping the european regional educational distribution: educational attainment and inequality
- by Andrés Rodríguez-Pose and Vassilis Tselios
The geography of education, especially at subnational level, is a huge black box. Basically nothing is known about the distribution of educational attainment and inequality across regions in Europe. This paper addresses this gap in the literature by mapping educational attainment and inequality in 102 regions in western Europe, using data extracted from the European Community Household Panel (ECHP) covering more than 100,000 individuals over the period 1995-2000. The results of this Exploratory Spatial Data Analysis (ESDA) reveal a strong correlation between levels of educational attainment and inequality across regions in Europe. Regions with similar educational conditions tend to cluster, often within national borders. In addition a North-South and an urban-rural dimension is evident. Northern regions and large European metropoli have not only the most educated labour force, but also the lowest levels of inequality. Educational inequality seems to be, in any case, a fundamentally within region phenomenon. 90 percent of the educational inequality in Europe takes place among individuals living in the same region.
- Created: 2007/09/24
- Keywords: educational attainment; educational inequality; regions; exploratory spatial data analysis; Europe; urbanisation; EU North-South divide
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No. 2007-17
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- Education and income inequality in the regions of the European Union
- by Andrés Rodríguez-Pose and Vassilis Tselios
This paper provides an empirical study of the determinants of income inequality across regions of the EU. Using the European Community Household Panel dataset for 102 regions over the period 1995-2000, it analyses how microeconomic changes in human capital distribution affect income inequality for the population as a whole and for normally working people. The different static and dynamic panel data analyses conducted reveal that, while the relationship between income inequality and income per capita is positive, the relationship between income inequality and educational attainment is not clear. Across European regions high levels of inequality in educational attainment are associated with higher income inequality. This may be interpreted as the responsiveness of the EU labour market to differences in qualifications and skills. The above results are robust to changes in the definition of income distribution. Other results indicate that population ageing and inactivity are sensitive to the specification model, while work access and latitude are negatively associated to income inequality. Urbanisation has a negative impact on inequality, but for the population as a whole only, and the relationship between unemployment and income inequality is positive. Female participation in the labour force is negatively associated with inequality and explains a major part of the variation in inequality. Finally, income inequality is lower in social-democratic welfare states, in Protestant areas, and in regions with Nordic family structures.
- Created: 2007/09/24
- JEL-Codes: Income inequality; educational attainment; educational inequality; regions; Europe
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No. 2007-16
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- Implementation in adaptive better-response dynamics
- by Antonio Cabrales and Roberto Serrano
We study the classic implementation problem under the behavioral assumption that agents myopically adjust their actions in the direction of better-responses within a given institution. We offer results both under complete and incomplete information. First, we show that a necessary condition for assymptotically stable implementation is a small variation of (Maskin) monotonicity, which we call quasimonotonicity. Under standard assumptions in economic environments, we also provide a mechanism for Nash implementation which has good dynamic properties if the rule is quasimonotonic. Thus, quasimonotonicity is both necessary and almost sufficient for assymptotically stable implementation. Under incomplete information, incentive compatibility is necessary for any kind of stable implementation in our sense, while Bayesian quasimonotonicity is necessary for assymptotically stable implementation. Both conditions are also essentially sufficient for assymptotically stable implementation. We then tighten the assumptions on preferences and mutation processes and provide mechanisms for stochastically stable implementation under more permissive conditions on social choice rules.
- Created: 2007/08/22
- JEL-Codes: C72; D70; D78
- Keywords: implementation; bounded rationality; evolutionary dynamics; mechanisms
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No. 2007-15
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- El uso de sistemas dinámicos estocásticos en la Teoría de Juegos y la Economía
- by Roberto Serrano
Este breve artículo glosa algunas de las aplicaciones recientes de sistemas dinámicos estocásticos a la Teoría de Juegos y la Economía. El modelo que se describe con más detalle demuestra que la única asignación estocásticamente estable de un proceso de intercambio entre coaliciones sujeto a errores en la toma de decisiones es la asociada al equilibrio de mercado. Resultados como éste proveen una nueva fundamentación a un concepto central en la Teoría Económica.
- Created: 2007/06/19
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No. 2007-14
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- Robust virtual implementation with incomplete information: Towards a reinterpretation of the Wilson doctrine
- by Georgy Artemov, Takashi Kunimoto and Roberto Serrano
We consider robust virtual implementation, where robustness is the requirement that implementation succeed in all type spaces consistent with a given payoff type space as well as with a given space of first-order beliefs about the other agents' payoff types. This last bit, which constitutes our reinterpretation of the Wilson doctrine, allows us to obtain very permissive results. Our first result is that generically, if there are at least three alternatives, any incentive compatible social choice function is robustly virtually implementable in iteratively undominated strategies. Further, we characterize robust virtual implementation in iteratively undominated strategies by means of incentive compatibility and measurability. Our characterization is independent of the presence of monetary transfers or assumptions alike, made in previous studies. Our work also clarifies the measurability condition in connection to the generic diversity of preferences used in our first result.
- Created: 2007/05/27
- JEL-Codes: C72; C78; D82
- Keywords: Wilson doctrine; mechanism design; robust virtual implementation; iteratively undominated strategies; incentive compatibility; measurability; type diversity
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No. 2007-13
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- The geographical processes behind innovation: A Europe-United States comparative analysis
- by Riccardo Crescenzi, Andrés Rodríguez-Pose and Michael Storper
The United States and European Union differ significantly in terms of their innovative capacity: the former have been able to gain and maintain world leadership in innovation and technology while the latter continues to lag. Notwithstanding the magnitude of this innovation gap and the political emphasis placed upon it on both sides of the Atlantic, very little systematic comparative analysis has been carried out on its causes. The empirical literature has emphasised the structural differences between the two continents in the quantity and quality of the major 'inputs' to innovation: R&D investments and human capital. The very different spatial organisation of innovative activities in the EU and the US – as suggested by a variety of contributions in the field of economic geography – could also influence innovative output. This paper analyses and compares a wide set of territorial processes that influence innovation in Europe and the United States. The higher mobility of capital, population, and knowledge in the US not only promotes the agglomeration of research activity in specific areas of the country but also enables a variety of territorial mechanisms to fully exploit local innovative activities and (informational) synergies. In the European Union, in contrast, imperfect market integration, and institutional and cultural barriers across the continent prevent innovative agents from maximising the benefits from external economies and localised interactions, but compensatory forms of geographical process may be emerging in concert with further European integration.
- Created: 2007/04/27
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No. 2007-12
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- Social capital, rules, and institutions: a cross-country
investigation
- by Thomas Farole, Andrés Rodríguez-Pose and Michael Storper
Research on the institutional foundations of economic development emphasizes either rulebound systems of exchange or informal bonds between individuals and within small groups. This corresponds to a classical division in social science, between the forces of society and those of community. This cleavage largely ignores their interactions, which are likely to shape the institutions that underpin economic development in decisive ways. This paper operationalises and tests how the interaction of the forces of community (or social capital) and society (or rules) impact three types of institutions: those involved in problem solving, those that shape microeconomic efficiency and those that influence social policy, across fiftyeight countries. We find that both community and society are important determinants across all institutional domains, and are in many cases mutually reinforcing, but that different specific aspects of community and society are most relevant to different institutional domains. Instrumental associationalism, whether formal or informal, and a robust rules environment are the most important determinants of positive institutional outcomes.
- Created: 2007/04/27
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No. 2007-11
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- Fiscal decentralisation, efficiency, and growth
- by Andrés Rodríguez-Pose, Sylvia A. R. Tijmstra and Adala Bwire
Much of the recent worldwide trend towards devolution has been driven by the belief that fiscal decentralization is likely to have a positive effect on government efficiency and economic growth. It is generally assumed that the transfer of powers and resources to lower tiers of government allows for a better matching of public policies to local needs and thus for a better allocation of resources. These factors, in turn, are expected to lead to an improvement in regional economic performance, if subnational authorities shift resources from current to capital expenditures in search of a better response to local needs. This paper tests these assumptions empirically by analysing the evolution of subnational expenditure categories and regional growth in Germany, India, Mexico, Spain, and the USA. We find that, contrary to expectations, decentralisation has coincided in the sample countries with a relative increase in current expenditures at the expense of capital expenditures, which has been associated with lower levels of economic growth in countries where devolution has been driven from above (India and Mexico), but not in those where it has been driven from below (Spain). The paper hypothesises that the differences in legitimacy between the central or federal government and subnational governments in top-down and bottom-up processes of devolution may be at the origin of the diverse capacity to deliver greater allocative and productive efficiency and, eventually, greater economic growth by devolved governments.
- Created: 2007/04/26
- Keywords: devolution; fiscal decentralisation; subnational expenditure; economic growth; Germany; India; Mexico; Spain; United States
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No. 2007-10
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- The evolution of bidding behavior in private-values auctions and double auctions
- by Rene Saran and Roberto Serrano
We apply stochastic stability to study the evolution of bidding behavior in private-values second-price, first-price and k-double auctions. The learning process has a strong component of inertia but with a small probability, the bids are modified in the direction of ex-post regrets. We identify essentially a unique bid that will be used by each type in the long run. In the second-price auction, this is the truthful bid. In the first-price auction, bidding half of one’s valuation is stable. The stable bid in the k-double auction is a toughening of the Chatterjee-Samuelson linear equilibrium strategy. If we add a friction in changing one’s bid, then truth-telling behavior is also obtained in the first-price and k-double auctions. Intuitively, the stochastically stable bid minimizes the maximal regret.
- Created: 2007/04/10
- JEL-Codes: C73; C78; D44; D83
- Keywords: stochastic stability; ex-post regret; second-price auction; first-price auction; k-double auction
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No. 2007-09
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- Ruggedness: The blessing of bad geography in Africa
- by Nathan Nunn and Diego Puga
There is controversy about whether geography matters mainly because of its contemporaneous impact on economic outcomes or because of its interaction with historical events. Looking at terrain ruggedness, we are able to estimate the importance of these two channels. Because rugged terrain hinders trade and most productive activities, it has a negative direct effect on income. However, in Africa rugged terrain afforded protection to those being raided during the slave trades. Since the slave trades retarded subsequent economic development, in Africa ruggedness also has had a historical indirect positive effect on income. Studying all countries worldwide, we find that both effects are significant statistically and that for Africa the indirect positive effect dominates the direct negative effect. Looking within Africa, we provide evidence that the indirect effect operates through the slave trades. We also show that the slave trades, by encouraging population concentrations in rugged areas, have also amplified the negative direct impact of rugged terrain in Africa.
- Created: 2007/03/01
- JEL-Codes: O11; O13; N50; N40
- Keywords: terrain ruggedness, slave trades, Africa, economic development
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No. 2007-08
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- An economic index of riskiness
- by Robert J. Aumann and Roberto Serrano
Define the riskiness of a gamble as the reciprocal of the absolute risk aversion (ARA) of an individual with constant ARA who is indifferent between taking and not taking that gamble. We characterize this index by axioms, chief among them a "duality" axiom which, roughly speaking, asserts that less risk-averse individuals accept riskier gambles. The index is homogeneous of degree 1, monotonic with respect to first and second order stochastic dominance, and for gambles with normal distributions, is half of variance/mean. Examples are calculated, additional properties derived, and the index is compared with others in the literature.
- Created: 2007/02/28
- JEL-Codes: C00; C43; D00; D80; D81; E44; G00
- Keywords: riskiness; risk aversion; expected utility; decision making
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No. 2007-07
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- Arrow’s impossibility theorem: Two simple single-profile versions
- by Allan M. Feldman and Roberto Serrano
In this short paper we provide two simple new versions of Arrow’s impossibility theorem, in a world with only one preference profile. Both versions are extremely transparent. The first version assumes a two-agent society; the second version, which is similar to a theorem of Pollak, assumes two or more agents. Both of our theorems rely on diversity of preferences axioms, and we explore alternative notions of diversity at length. Our first theorem also uses a neutrality assumption, commonly used in the literature; our second theorem uses a neutrality/monotonicity assumption, which is stronger and less commonly used. We provide examples to show the logical independence of the axioms, and to illustrate our points.
- Created: 2007/02/28
- JEL-Codes: D60; D70; D71
- Keywords: Arrow’s theorem; single-profile
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No. 2007-06
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- Bargaining
- by Roberto Serrano
This article is a survey on bargaining theory. The focus is the game theoretic approach to bargaining, both on its axiomatic and strategic counterparts. The application of bargaining theory to large markets and its connections with competitive allocations are also discussed.
- Created: 2007/02/28
- JEL-Codes: C7
- Forthcoming in Steven N. Durlauf and Lawrence Blume (eds.), The New Palgrave Dictionary of Economics, 2nd edition, London: McMillan
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No. 2007-05
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- Nash program
- by Roberto Serrano
This article is a brief survey on the Nash program for coalitional games. Results of noncooperative implementation of the Nash solution, the Shapley value and the core are discussed.
- Created: 2007/02/28
- JEL-Codes: C7
- Forthcoming in Steven N. Durlauf and Lawrence Blume (eds.), The New Palgrave Dictionary of Economics, 2nd edition, London: McMillan
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No. 2007-04
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- Marginal contributions and externalities in the value
- by Geoffroy de Clippel and Roberto Serrano
Our concern is the extension of the theory of the Shapley value to games with externalities. Using the standard axiom systems behind the Shapley value for an arbitrary exogenous coalition structure leads to the identification of bounds on players’ payoffs around an "externality-free" value. In endogenizing the coalition structure, we analyze a two-stage process of coalition formation in whose second stage our axiomatic results are applied. We find reasons to explain inefficient coalition structures, and provide sufficient conditions for efficiency.
- Created: 2007/02/28
- JEL-Codes: C7; D62
- Keywords: externalities; marginal contributions; Shapley value; Pigouvian transfers; coalition formation
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No. 2007-03
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- Multiple equilibria as a difficulty in understanding correlated distributions
- by Anirban Kar, Indrajit Ray and Roberto Serrano
We view achieving a particular correlated equilibrium distribution for a normal form game as an implementation problem. We show, using a parametric version of the two-person Chicken game and a wide class of correlated equilibrium distributions, that a social choice function that chooses a particular correlated equilibrium distribution from this class does not satisfy the Maskin monotonicity condition and therefore can not be fully implemented in Nash equilibrium.
- Created: 2007/02/28
- JEL-Codes: C72
- Keywords: correlated equilibrium distribution; implementation; monotonicity
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No. 2007-02
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- Decomposing the growth in residential land in the United States
- by Henry G. Overman, Diego Puga and Matthew A. Turner
This paper decomposes the growth in land occupied by residences in the United States to give the relative contributions of changing demographics versus increases in the land area used by individual households. Between 1976 and 1992 the amount of residential land in the United States grew 47.5% while population only grew 17.8%. At first glance, this suggest an important role for per-household increases. However, the calculations in this paper show that only 24.3% of the growth in residential land area can be attributed to State-level changes in land per household. 37.5% is due to overall population growth, 5.9% to the shift of population towards States with larger houses, 22.7% to an increase in the number of households over this period, and the remaining 9.5% to interactions between these changes. There are large differences across states and metropolitan areas in the relative importance of these components.
- Created: 2007/02/19
- JEL-Codes: R14; O51
- Keywords: land use; population growth
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No. 2007-01
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- Fat City: The relationship between urban sprawl and obesity
- by Jean Eid, Henry G. Overman, Diego Puga and Matthew A. Turner
We study the relationship between urban sprawl and obesity. Using data that tracks individuals over time, we find no evidence that urban sprawl causes obesity. We show that previous findings of a positive relationship most likely reflect a failure to properly control for the fact the individuals who are more likely to be obese choose to live in more sprawling neighborhoods. Our results indicate that current interest in changing the built environment to counter the rise in obesity is misguided.
- Created: 2007/02/19
- JEL-Codes: I12; R14
- Keywords: urban sprawl; obesity; selection effects
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