Discussion Papers

Papers from 1998 onwards are available on-line as .PDF files.


10 Most Recent Papers

15/21 Ali al-Nowaihi, Sanjit Dhami

Adobe Acrobat (PDF) 15/21 Evidential equilibria: Heuristics and biases in static games of complete information Working Paper Version

Standard equilibrium concepts in game theory find it difficult to explain the empirical evidence from a large number of static games including the prisoners dilemma game, the hawk-dove game, voting games, public goods games and oligopoly games. Under uncertainty about what others will do in one-shot games, evidence suggests that people often use evidential reasoning (ER), i.e., they assign diagnostic significance to their own actions in forming beliefs about the actions of other like-minded players. This is best viewed as a heuristic or bias relative to the standard approach. We provide a formal theoretical framework that incorporates ER into static games by proposing evidential games and the relevant solution concept: evidential equilibrium (EE). We derive the relation between a Nash equilibrium and an EE. We illustrate these concepts in the context of the prisoners dilemma game.

15/20 Panicos O. Demetriades, Peter L. Rousseau

Adobe Acrobat (PDF) 15/20 The Changing Face of Financial Development

We provide evidence from a large number of countries which demonstrates the changing nature of the finance-growth nexus. Specifically, we show that financial depth is no longer a significant determinant of long-run growth. Instead we find evidence to suggest that certain financial reforms have sizeable growth effects, which can be positive or negative depending on how well banks are regulated and supervised.

15/19 Heinrich H. Nax, Alexandros Rigos

Adobe Acrobat (PDF) 15/19 Assortativity evolving from social dilemmas

Assortative mechanisms can overcome tragedies of the commons that otherwise result in dilemma situations. Assortativity criteria include genetics (e.g. kin selection), preferences (e.g. homophily), locations (e.g. spatial interaction) and actions (e.g. meritocracy), usually presuming an exogenously fixed matching mechanism. Here, we endogenize the matching process with the aim of investigating how assortativity itself, jointly with cooperation, is driven by evolution. Our main finding is that only full-or-null assortativities turn out to be long-run stable, their relative stabilities depending on the exact incentive structure of the underlying social dilemma. The resulting social loss is evaluated for general classes of dilemma games, thus quantifying to what extent tragedy of the commons may be endogenously overcome.

15/18 Svetlana Andrianova, Badi Baltagi, Thorsten Beck, Panicos Demetriades, David Fielding, Stephen Hall, Steven Koch, Robert Lensink, Johan Rewilak and Peter Rousseau

Adobe Acrobat (PDF) 15/18 A New International Database on Financial Fragility

We present a new database on financial fragility for 124 countries over 1998 to 2012. In addition to commercial banks, our database incorporates investment banks and real estate and mortgage banks, which are thought to have played a central role in the recent financial crisis. Furthermore, it also includes cooperative banks, savings banks and Islamic banks, that are often thought to have different risk appetites than do commercial banks. As a result, the total value of financial assets in our database is around 50% higher than that accounted for by commercial banks alone. We provide eight different measures of financial fragility, each focussing on a different aspect of vulnerability in the financial system. Alternative selection rules for our variables distinguish between institutions with different levels of reporting frequency.

15/17 Asako Ohinata and Matteo Picchio

Adobe Acrobat (PDF) 15/17 The financial support for long-term elderly care and household savings behaviour

We analyse how the financial support for long-term elderly care affects the level of household savings. Using a difference-in-differences estimator, we investigate the 2002 Scottish reform, which introduced free formal personal care for all the elderly aged 65 and above residing in Scotland. Our semiparametric estimation technique allows the policy effects to be flexibly estimated across age groups. We find that the Scottish policy reduced the average household saving by about £7,200. Moreover, the estimated effects are heterogeneous across age groups of the head of household: these effects are particularly strong among those aged between 40 and 60. The largest effect is observed at age 49 with the reduction in the average household saving by £12,764.

15/16 Martin Kaae Jensen

Adobe Acrobat (PDF) 15/16 Existence, Uniqueness and Comparative Statics in Contests

Many important games are aggregative allowing for robust comparative statics analysis even when a game does not exhibit strategic complements or substitutes (Acemoglu and Jensen (2013)). This paper establishes such comparative statics results for contests improving upon existing results by (i) allowing payoff functions to be discontinuous at the origin, and (ii) allowing for asymmetric rent-seeking contests and patent races. A leading example where (i) is relevant is the classical Tullock contest (Tullock (1980)). The paper also studies existence and uniqueness of equilibria extending the results of Szidarovszky and Okuguchi (1997) and Cornes and Hartley (2005) to patent races.

15/15 Ben Lockwood and James Rockey

 Adobe Acrobat (PDF) 15/15 Negative Voters: Electoral Competition with Loss-Aversion

This paper studies how voter loss-aversion affects electoral competition in a Downsian setting. Assuming that voters’ reference point is the status quo, we show that loss-aversion has a number of effects. First, there is policy rigidity both parties choose platforms equal to the status quo, regardless of other parameters. Second, that there is a moderation effect when there is policy rigidity, the equilibrium policy outcome is closer to the moderate voters’ ideal point than in the absence of loss-aversion. In a dynamic extension of the model, we consider how parties strategically manipulate the status quo to their advantage, and we find that this increases policy rigidity. Finally, we show that with loss-aversion, incumbents adjust less than challengers to changes in voter preferences. The underlying force is that the status quo works to the advantage of the incumbent. This prediction of asymmetric adjustment is new, and we test it using elections to US state legislatures. The results are as predicted: incumbent parties respond less to shocks in the preferences of the median voter.  

15/14 Martin Kaae Jensen 

Adobe Acrobat (PDF) 15/14 Distributional Comparative Statics

Distributional comparative statics is the study of how individual decisions and equilibrium outcomes vary with changes in the distribution of economic parameters (income, wealth, productivity, distortions, information, etc.). This paper develops tools to address such issues. Central to the developments is a new condition called quasi-concave differences which implies concavity of the policy function in optimization problems. The results are used to show how Bayesian equilibria respond to increased individual uncertainty (less precise private signals); and to derive conditions for concavity of policy functions in general stochastic dynamic programming problems. The latter generalizes Carroll and Kimball (1996) to models with borrowing constraints in the spirit of Aiyagari (1994). 

15/13 Heather D. Gibson, Stephen G. Hall and George S. Tavlas

Adobe Acrobat (PDF) 15/13 How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices 

We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a long-run recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks’ equity-prices. Our results also point to the importance of using levels of equity prices -- rather than rates of return -- in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices.  

15/12 Ian Crawford and Matthew Polisson

Adobe Acrobat (PDF) 15/12 Demand Analysis with Partially Observed Prices 

In empirical demand, industrial organization, and labor economics, prices are often unobserved or unobservable since they may only be recorded when an agent transacts. In the absence of any additional information, this partial observability of prices is known to lead to a number of identification problems. However, in this paper, we show that theory-consistent demand analysis remains feasible in the presence of partially observed prices, and hence partially observed implied budget sets, even if we are agnostic about the nature of the missing prices. Our revealed preference approach is empirically meaningful and easy to implement. We illustrate using simple examples.    

15/11 Philippe De Donder and Francisco Martinez-Mora

Adobe Acrobat (PDF) 15/11 On the Political Economy of University Admissions Standards 

We study the political determination of the proportion of students attending university when access to higher education is rationed by admission tests. Parents differ in income and in the ability of their unique child. They vote over the minimum ability level required to attend public universities, which are tuition-free and financed by proportional income taxation. University graduates become high skilled, while the other children attend vocational school and become low skilled. Even though individual preferences are neither single-peaked nor single-crossing, we obtain a unique majority voting equilibrium, which can be either classical (with 50% of the population attending university) or ends-against-the-middle with less than 50% attending university (and parents of low and high ability children favoring a smaller university system). The majority chosen university size is smaller than the Pareto efficient level in an ends-against-the-middle equilibrium. Higher income inequality decreases the majority chosen size of the university. A larger positive correlation between parents’ income and child’s ability leads to a larger university populated by a larger fraction of rich students, in line with the so-called participation gap. Our results are robust to the introduction of private schooling alternatives, financed with fees.        

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